Investors' Misweighting of Firm-Level Information and the Market's Expectations of Earnings

• 成果类型: Article
• 署名作者: Keskek, Sami; Myers, James N.; Myers, Linda A.
• 署名单位: State University System of Florida; Florida State University; University of Tennessee System; University of Tennessee Knoxville
• 刊物名称: CONTEMPORARY ACCOUNTING RESEARCH
• ISSN/ISSBN: 0823-9150
• DOI: 10.1111/1911-3846.12578
• 发表日期: 2020
• 页码: 1828-1853
• 关键词: financial analysts forecasts; time-series; IMPLIED COST; fundamental-analysis; FULLY REFLECT; expected rate; stock-prices; return; superiority; INVESTMENT

摘要

Prior studies use fundamental earnings forecasts to proxy for the market's expectations of earnings because analyst forecasts are biased and are available for only a subset of firms. We find that as a proxy for market expectations, fundamental forecasts contain systematic measurement errors analogous to those in analysts' biased forecasts. Therefore, these forecasts are not representative of investors' beliefs. The systematic measurement errors from using fundamental forecasts to proxy for market expectations occur because investors misweight the information in many firm-level variables when estimating future earnings, but fundamental forecasts are formed using the historically efficient weights on firm-level variables. Thus, we develop an alternative ex ante proxy for the market's expectations of future earnings (the implied market forecast) using the historical (and inefficient) weights, as reflected in stock returns, that the market places on firm-level variables. A trading strategy based on the implied market forecast error, which is measured as the difference between the implied market forecast and the fundamental forecast, generates excess returns of approximately 9 percent per year. These returns cannot be explained by investors' reliance on analysts' biased forecasts. Overall, our results reveal that market expectations differ from both fundamental forecasts and analysts' forecasts.