An examination of the statistical significance and economic relevance of profitability and earnings forecasts from models and analysts
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 inclu...
Saved in:
Main Authors: | , , |
---|---|
Format: | text |
Language: | English |
Published: |
Institutional Knowledge at Singapore Management University
2017
|
Subjects: | |
Online Access: | https://ink.library.smu.edu.sg/soa_research_all/4 https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=1003&context=soa_research_all |
Tags: |
Add Tag
No Tags, Be the first to tag this record!
|
Institution: | Singapore Management University |
Language: | English |
id |
sg-smu-ink.soa_research_all-1003 |
---|---|
record_format |
dspace |
spelling |
sg-smu-ink.soa_research_all-10032018-06-08T06:33:51Z An examination of the statistical significance and economic relevance of profitability and earnings forecasts from models and analysts EVANS, Mark E. NJOROGE, Kenneth OW YONG, Keng Kevin 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. 2017-09-01T07:00:00Z text application/pdf https://ink.library.smu.edu.sg/soa_research_all/4 https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=1003&context=soa_research_all http://creativecommons.org/licenses/by-nc-nd/4.0/ Research Collection School of Accountancy eng Institutional Knowledge at Singapore Management University Earnings Forecasts Financial Statement Analysis Security Analysts Accounting |
institution |
Singapore Management University |
building |
SMU Libraries |
country |
Singapore |
collection |
InK@SMU |
language |
English |
topic |
Earnings Forecasts Financial Statement Analysis Security Analysts Accounting |
spellingShingle |
Earnings Forecasts Financial Statement Analysis Security Analysts Accounting EVANS, Mark E. NJOROGE, Kenneth OW YONG, Keng Kevin An examination of the statistical significance and economic relevance of profitability and earnings forecasts from models and analysts |
description |
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. |
format |
text |
author |
EVANS, Mark E. NJOROGE, Kenneth OW YONG, Keng Kevin |
author_facet |
EVANS, Mark E. NJOROGE, Kenneth OW YONG, Keng Kevin |
author_sort |
EVANS, Mark E. |
title |
An examination of the statistical significance and economic relevance of profitability and earnings forecasts from models and analysts |
title_short |
An examination of the statistical significance and economic relevance of profitability and earnings forecasts from models and analysts |
title_full |
An examination of the statistical significance and economic relevance of profitability and earnings forecasts from models and analysts |
title_fullStr |
An examination of the statistical significance and economic relevance of profitability and earnings forecasts from models and analysts |
title_full_unstemmed |
An examination of the statistical significance and economic relevance of profitability and earnings forecasts from models and analysts |
title_sort |
examination of the statistical significance and economic relevance of profitability and earnings forecasts from models and analysts |
publisher |
Institutional Knowledge at Singapore Management University |
publishDate |
2017 |
url |
https://ink.library.smu.edu.sg/soa_research_all/4 https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=1003&context=soa_research_all |
_version_ |
1681132752089382912 |