Adaptive Expectations, Time-Series Models, and Analyst Forecast Revision

Abstract

Interim earnings reports are of continuing interest to both practitioners and academics in the accounting/finance community. Among practitioners, the FASB is modifying APB Opinion No. 28 on interim financial reporting and has issued a discussion memorandum on the subject (May 25, 1978). The Financial Executives Research Foundation has lately issued its report on interim financial statements (Schiff [1978]). In academic circles, recent research has focused upon how interim reports affect the accuracy of security analysts' earnings forecasts. The evidence shows clearly that, conditional upon the receipt of interim reports, analysts typically improve the accuracy of their forecasts of both annual and future quarterly earnings (Crichfield, Dyckman, and Lakonishok [1978] and Brown and Rozeff [1979b], respectively).' Since security analysts are capital market participants who actually use interim reports, their forecasting behavior should be of academic