‘Earnings Forecasting Research: An Overview and Critique

Past research has extensively addressed the influence of accounting information on stock prices. However, results of this branch of capital market based research have been inconclusive, partly due to methodological deficiencies. Focusing on differential groups of market participants, such as financial analysts forecasting earnings, might contribute to our understanding of the functioning of capital markets and the role of accounting information. In this paper an overview and critique of the earnings forecasting literature is presented. For the purpose of offering some insight into the present state of the earnings forecasting research and detecting the remaining deficiencies in our understanding of financial analysts a classification is made, Studies are divided into process-oriented studies and results-oriented studies. Studying individual forecasting processes is necessary, since earnings forecasts at the aggregate level are found to be distorted by inefficient individual information processing. However, process-oriented studies do not cover all aspects of the earnings forecasting process. For that reason, judgmental forecasting and decision making literature is drawn into the discussion to provide some directions for future research.