JUHA - PEKKA KALLUNKI , MINNA MARTIKAINEN and HENRIK NILSSON Analyst Profession , Accounting Earnings and Stock Returns : Swedish Evidence

Recent research by Liu and Thomas (2000) and Dechow et al. (1999) suggest that analysts’ forecasts are important in explaining contemporaneous prices/returns and they strengthen the estimated returnearnings relation. This study investigates the role of the analysts’ earnings forecasts in explaining returns in Sweden where the analyst profession has considerably developed during the last two decades. This development raises the question of how well the Swedish analysts’ forecasts perform if compared to reported accounting earnings in explaining returns. Analysts’ forecasts and changes in them are found to be important in explaining returns. This forward looking information outperforms This research was supported by Jan Wallanders och Tom Hedelius stiftelse, Sweden and OKO Bank of Finland. The authors gratefully acknowledge the contribution of I/B/E/S International Inc. for providing earnings per share forecast data, available through the Institutional Brokers estimate system. We are grateful for the valuable comments and suggestions of Lars Hassel, Juha Junttila and Rickard Olsson. JUHA-PEKKA KALLUNKI University of Oulu, Department of Accounting and Finance • e-mail: [email protected] MINNA MARTIKAINEN Laurea Polytechnic HENRIK NILSSON Umeå School of Business and Economics, Department of Business Administration 405 A N A L Y S T P R O F E S S I O N , A C C O U N T I N G E A R N I N G S A N D S T O R C K ... current earnings and earnings changes in explaining returns. Even so, a combination of accounting data and forecasts performs best in terms of explanatory power. As a robustness check of the results, random coefficient models and industry effects are investigated.