Analysts’ EPS Forecasts: The Effects of Forecast Uncertainty and Forecast Precision on Investors’ Judgments of Forecast Reliability

Abstract

I use controlled experiments to investigate the joint effects of forecast precision and forecast uncertainty on investor judgments. I find that forecast precision moderates the effects of forecast uncertainty on investors’ forecast reliability judgments such that the effects of forecast uncertainty on investors’ judgments of forecast reliability are more negative when an analyst’s point earnings per share (EPS) forecast is round than when it is precise. In addition, the relationship between forecast precision and investors’ judgments of forecast reliability is mediated by investors’ perceptions of analysts’ personal characteristics related to their forecasting ability. My evidence also suggests that while forecast uncertainty continues to exert a negative effect on investors’ investment judgments, forecast precision does not play a role in mitigating these negative effects. Using a supplementary within-participants experiment, I further find that investors may not be consciously aware of how forecast precision influences their judgments of forecast reliability. My findings are informative to analysts and investors because they provide insights into how investors perceive and react to rounding in analysts’ point EPS forecasts under differing levels of forecast uncertainty.