Abstract
Event studies of market efficiency measure earnings surprises using the consensus error (CE), given as actual earnings minus the average professional forecast. If a subset of forecasts can be biased, the ideal but difficult to estimate parameter-dependent alternative to CE is a nonlinear filter of individual errors that adjusts for bias. We show that CE is a poor parameter-free approximation of this ideal measure. The fraction of misses on the same side (FOM), which discards the magnitude of misses, offers a far better approximation. FOM performs particularly well against CE in predicting the returns of U.S. stocks, where bias is potentially large.
Original language | English (US) |
---|---|
Pages (from-to) | 943-983 |
Number of pages | 41 |
Journal | Journal of Finance |
Volume | 74 |
Issue number | 2 |
DOIs | |
State | Published - Apr 2019 |
All Science Journal Classification (ASJC) codes
- Accounting
- Finance
- Economics and Econometrics