Effect of time on revisions to earnings per share forecasts by financial analysts

Abstract

Scope and Method of Study: This study develops a model that tests the decision making theory that as the time for actual corporate earnings approaches, financial analysts will make more downward adjustments to their earnings forecasts than upward adjustments. The period of time encompassed in the study includes the early May and early January earnings adjustments' for the years 1976 through 1987. In order to test for statistical significance, two univariate statistical methods were used. The first tested the relationship between the total number of downward adjustments to the total number of adjustments made during the sample period. The second tested for a statistically significant difference between observed and expected frequency distributions.

Findings and Conclusions: In the test for a significant relationship between the number of downward adjustment s to the total number of adjustments, the null hypothesis is rejected. A significant relationship was revealed such that, overall, more downward than upward revisions in earnings estimates were made. This relationship provides strong support for the organizational decision making theory that as the time for an outcome comes closer, the decision maker becomes more pessimistic. In the test for statistically significant differences between observed and expected frequency distributions, the test fail led to reject the null hypothesis. However, the second test does show direction because more downward revisions were observed in January than in May which is predicted in the TOV model.