Earnings Attributes that Contribute to Analyst Forecasting Errors: Empirical Evidence from Korea

Analysts' forecasts are important for providing useful guidance to investors, especially individual or small investors, and therefore it becomes critical to identify the elements which can potentially increase errors in analysts' forecasts. This study investigates potential factors which can lead to errors in forecasting by analysts, specifically in terms of the level and attributes of corporate earnings. Utilizing a sample of firms listed on the Korean stock markets, this study provides evidence that firms with more volatile and unpredictable earnings feature less accurate analyst forecasts. This study fills a void in the literature by conducting empirical tests for earnings attributes in terms of volatility and unpredictability that could potentially undermine the forecast accuracy. The negative association between the quality of earnings and forecast accuracy is more pronounced for firms with negative net income values. Additional analysis demonstrates that forecast accuracy is significantly lower for the fourth quarter than for other fiscal quarters and that fourth quarter earnings tend to be more volatile and unpredictable. This study contributes to the literature by providing new empirical evidence regarding the comprehensive effects of earnings quality and level on analysts' forecasting accuracy and further suggests potential factors contributing to the fourth quarter anomaly in analyst forecasts in terms of earnings attributes.