The Predictive Value of Interim Reports for Improving Forecasts of Future Quarterly Earnings

Abstract

Estimates of future quarterly earnings are of prime importance to capital market participants for formulating their investment decisions. Superior ability to forecast future earnings may enable investors to reap extraordinary returns by trading in the affected securities. The extant forecast accuracy literature has presented convincing evidence that interim accounting data contain predictive value for improving forecasts of annual earnings. But by concentrating upon forecasts of annual earnings, past research has presented no evidence regarding the predictive value of interim data for improving forecasts of future quarterly earnings. Improved annual forecasts are not synonymous with improved forecasts of future quarterly earnings. As the year progresses, the annual earnings forecast generally can be significantly improved by substituting known interim data for their earlier predicted values, leaving intact previous forecasts of future quarterly earnings. By introducing an alternative methodology, evidence is presented that interim data have predictive value for improving forecasts of future quarterly earnings.