An Empirical Assessment of the Credibility Premium Associated with Meeting or Beating Both Time-Series Earnings Expectations and Analysts' Forecasts

Résumé du livre

Recent research results indicate a market premium for firms that met or beat analysts' forecasts. We find evidence consistent with these results. More important, however, we find a market premium for firms that met or beat time-series forecasts, and also the highest market premium for firms that met or beat both analysts' and time-series forecasts, relative to firms that met or beat one or neither forecast. In fact, there is no premium for firms that met or beat only analysts' or only time-series forecasts. Investors seem to consider both analysts' and time-series forecasts jointly, with the act of meeting or beating both forecasts providing the most credible signal of superior future financial performance. This 'credibility' premium to firms that met or beat time-series forecasts (as proxied for by the Foster model, 1977) is in addition to the premium for meeting or beating analysts' forecasts. The premium is supported by assessments of future financial performance over the two subsequent years and by tests of the predictability of earnings for the following quarter. Finally, we find that abnormal trading was greatest when both forecasts were met or beaten, compared to when only one or the other or neither forecast was met or beaten. This is further evidence that investors view the meeting or beating of both forecasts as the strongest signal of enhanced credibility in reported earnings.