The Relative Accuracy Of Forecasts Made By Management And By Financial Analysts

Earnings forecasts made by management and analysts are both important information sources for investors in developing firms’ earnings expectations and making investment decisions. Although the literatures on the accuracy of management forecasts and analyst forecasts are extensive, few prior research papers compare the relative accuracy of them. Under what circumstances should investors believe in management forecasts, and under what circumstances should they believe more in analyst forecasts?The paper used the management forecasts disclosed by Shanghai and Shenzhen A-share listed companies from2009to2012and the matched analyst forecasts as study sample, and examined the relative accuracy of earnings per share (EPS) forecasts made by management and analysts. The main conclusions are as following: Firstly, analysts have a forecast advantage at the macroeconomic level. Analyst forecasts are more accurate when a firm’s performance is significantly affected by macroeconomic factors like GDP, energy prices and interest rate. Secondly, management has a forecast advantage at the firm level. Management forecasts are more accurate when management’s response to unusual situations, such as when the firm faces abnormally inventory buildup and when it experiences a loss or excess capacity, are difficult to anticipate by outsiders.The conclusions give investors a reason to choose between management forecasts and analyst forecasts under different circumstances, and can help them form their own expectations to make investment decisions.