The Rationality of Financial Analysts' Forecasts of Earnings

Abstract

To assess the rationality of earnings forecasts for French companies, the author distinguishes between two categories of companies: those whose P/Es are in line with the market and those whose P/Es are not. For those companies whose P/Es are in line with the market, he finds earnings forecasts are rational. For those companies with extreme P/E values, he finds that the forecasts are not rational in the strict sense but can be considered dynamically rational—that is, increasingly rational as the earnings publication date approaches. He suggests that the quality of information for companies with extreme P/Es may be poor, which influences the quality of the forecasts. These findings are at odds with research on earnings forecasts in the U.S. and U.K. markets, but the author thinks this discrepancy is because of a failure to distinguish between types of companies.