Examining the Impacts of Regulation on Long-term Earnings Growth Forecasts

Open Access
Author:
Salvatora, Bennett Anthony
Area of Honors:
Finance
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
  • Joseph Randall Woolridge, Thesis Supervisor
  • Brian Spangler Davis, Honors Advisor
Keywords:
  • earnings per share
  • EPS
  • long-term growth
  • forecasts
  • analyst estimates
  • finance
  • equity research
Abstract:
The following study analyzes the accuracy and bias of sell-side equity analyst’s long-term earnings per share growth forecasts. Having a firm understanding of the accuracy of analyst’s long-term earnings per share estimates is vital for any professionals using such forecasts when performing financial valuation, estimating cost of capital, and making investment decisions. By comparing long-term earnings per share growth rate estimates to actual earnings per share growth rates observed, both the accuracy and bias of forecasts were evaluated. Specifically, this study was focused on discovering whether analysts’ estimates have improved over time. Even with the implementation of recent regulatory reforms aimed to improve the bias and inaccuracy of analyst forecasts, this study found no significant evidence that such changes have been helpful in improving the accuracy or continued upward bias that exists in long-term earnings per share growth rate estimates. Recognition of this persistent bias and inaccuracy of long-term earnings per share growth rate estimates is vital for all market participants to understand and take into consideration in order to make prudent investment decisions.