Analysts’ Long-Horizon Earnings Forecast Properties and Long-Horizon Macroeconomic Forecast Optimism

Abstract

We examine whether the properties of earnings forecasts – bias and dispersion are different across periods when macroeconomic forecasts are optimistic than non-optimistic, and whether this difference in analyst forecast optimism is stronger during recessionary periods. We find that the long-horizon earnings forecasts are more optimistically biased in periods when the macroeconomic forecasts are optimistically biased as well, and the bias is more pronounced during periods of recession. We also find that the long-horizon earnings forecast dispersion is lower in periods when the long-horizon macroeconomic forecasts are optimistic than in other periods; and this difference is attenuated during recessionary periods. These results suggest that firms that meet or beat earnings forecasts when there is no recession and macroeconomic forecast is optimistic are likely to have opportunistically biased their long-term forecasts and walked them down, i.e. opportunistic; and that firms that meet or beat earnings forecasts when there is recession and macroeconomic forecast is optimistic are likely to be the ones that are positioned to perform well when the economy recovers. Consistent with this we find that premium for meeting or beating the analysts’ earnings forecasts is highest in periods when there is recession and macroeconomic forecasts are optimistic; and there is no premium when there is no recession and macroeconomic forecast is optimistic. Collectively, the results show the interaction between the macroeconomic outlook and firm-level forecast properties.