Differences in Commercial Database Reported Earnings: Implications for Inferences Concerning Analyst Forecast Rationality, the Association between Prices and Earnings, and Firm Reporting Discretion

Significant changes in mean and median analysts’ forecasts errors documented in recent studies are not synchronized across commercial forecast databases over time and are, in large part, a function of the definitions and procedures that determine the reported earnings component of earnings surprises. In this study we describe a number of complications researchers face in drawing inferences from forecast error metrics that are based on reported earnings numbers supplied by the major forecast data providers (FDPs) First Call, Zacks and I/B/E/S rather than metrics based on commonly used definitions of Compustat reported earnings. We show how differences across and intertemporal changes in FDP practices can have an important impact on inferences drawn in studies concerning analyst rationality, the association between stock prices and earnings news, firm earnings management, and stock market mispricing. We illustrate the importance of researchers’ choice of reported earnings data on inferences with examples from the literatures on earnings response coefficients (Bradshaw, Moberg and Sloan [2000]), analyst forecast rationality (Matsumoto [1999] and Brown [1999]), and value relevance of earnings (Collins, Maydew and Weiss [1997]).