Analysts’ Earnings Forecasts for DAX100 Firms During the Stock Market Boom of the 1990s

Abstract

This paper examines the reliability of financial analysts’ consensus earnings forecasts in the 1990s. Analysts are often accused of having fuelled the stock market boom with exaggerated evaluations of firms’ prospects. However, this criticism primarily refers to the analysts’ buy recommendations rather than earnings forecasts. Although biases in earnings forecasts have been reported since the 1980s, a systematic study capturing the period of ‘irrational exuberance’ until 2000 on the German stock market has not yet been published. Our data set consists of DAX100 firms, leaving out the peculiarities of forecasting earnings (or rather losses) of young technology firms. To evaluate the information content of analysts’ forecasts, we confront them with five alternative forecasting models. The empirical results reveal that analysts’ forecasts were too optimistic throughout the entire sample period. However, contrary to the increase in stock prices, the optimistic bias has declined over time. If the bias is removed, the analysts’ consensus forecasts significantly outperform all other models considered. Thus, the forecasts seem to be informative with respect to earnings differences, even if the market level of earnings is optimistically overstated.