Publication Type
Journal Article
Publication Date
9-2017
Abstract
In this paper, we propose and empirically test a cross-sectional profitability forecasting model which incorporates two major improvements relative to extant models. First, in terms of model construction, we incorporate mean reversion through the use of a two-stage partial adjustment model and inclusion of a number of additional relevant determinants of profitability. Second, in terms of model estimation, we employ least absolute deviation (LAD) analysis instead of ordinary least squares (OLS) because the former approach is able to better accommodate outliers. Results reveal that forecasts from our model are more accurate than three extant models at every forecast horizon considered and more accurate than consensus analyst forecasts at forecast horizons of two through five years. Further analysis reveals that LAD estimation provides the greatest incremental accuracy improvement followed by the inclusion of income subcomponents as predictor variables, and implementation of the two-stage partial adjustment model. In terms of economic relevance, we find that forecasts from our model are informative about future returns, incremental to forecasts from other models, analysts’ forecasts, and standard risk factors. Overall, our results are important because they document the increased accuracy and economic relevance of a cross-sectional profitability forecasting model which incorporates improvements to extant models in terms of model construction and estimation.
Keywords
Earnings Forecasts, Financial Statement Analysis, Security Analysts
Discipline
Accounting
Research Areas
Accounting Information System
Publication
Contemporary Accounting Research
Volume
34
Issue
3
First Page
1453
Last Page
1488
ISSN
0823-9150
Identifier
10.1111/1911-3846.12307
Publisher
Canadian Academic Accounting Association
Citation
EVANS, Mark E.; NJOROGE, Kenneth; and OW YONG, Keng Kevin.
An examination of the statistical significance and economic relevance of profitability and earnings forecasts from models and analysts. (2017). Contemporary Accounting Research. 34, (3), 1453-1488.
Available at: https://ink.library.smu.edu.sg/soa_research_all/4
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1111/1911-3846.12307