The Accuracy of Forecasts by Management and by Financial Analysts.

The relative accuracy of management and financial analyst earnings per share forecasts has important implications both for accountants who prepare management forecasts and for users of earnings forecasts. This article reports on a study of the relative accuracy of the two sets of competing information. The subject of study was a sample of actual management and analyst forecasts. The management and analyst forecasts were first compared to each other. Then both groups of forecasts were compared to a third set of forecasts developed by extrapolating from the trend of previous earnings changes over time. This provided an indication of the overall quality of the two sets of forecasts. Results showed that differences in accuracy between the management and financial analyst forecasts were not statistically significant. The study also showed that both management forecasts and analyst forecasts prepared subsequent to the release of these management forecasts are superior to those developed using the simple extrapolative models tested here. Analyst forecasts reported prior to the announcement of management forecasts were not significantly more accurate than those of the simple naive model.