Analysts’ forecasts and uncertainty about firm value
Review of Accounting and Finance
ISSN: 1475-7702
Article publication date: 6 August 2018
Issue publication date: 3 September 2018
Abstract
Purpose
The purpose of this study is to use implied volatilities from exchange traded options to examine the interaction between analysts’ forecast revisions and the market’s perception of uncertainty about firm value.
Design/methodology/approach
The authors examine how characteristics of individual forecast revisions, e.g. news and changes in dispersion of forecasts, affect changes in implied volatilities, whether analysts use the observable changes in implied volatilities to inform their forecast revisions and whether changes in dispersion of forecasts are correlated with changes in implied volatilities.
Findings
The authors find that good (bad) news forecast revisions reduce (increase) investors’ perception of uncertainty about firm value, analysts do not appear to use changes in implied volatilities to shade their forecast revisions to good/bad news and dispersion of forecasts are a reasonable proxy for uncertainty about firm value as indicated by their correlation with implied volatilities.
Originality/value
Recent research on analysts’ forecast revisions and management forecasts has focused on risk perception rather than value. This paper extends this work with a risk metric based on market transactions in both a short and long window analysis, as well as univariate and multivariate analysis.
Keywords
Citation
Andrews, A., Sen, P. and Stephan, J. (2018), "Analysts’ forecasts and uncertainty about firm value", Review of Accounting and Finance, Vol. 17 No. 3, pp. 298-315. https://doi.org/10.1108/RAF-09-2016-0146
Publisher
:Emerald Publishing Limited
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