The Association between the Magnitude of Quarterly Earnings Forecast Errors and Risk-Adjusted Stock Returns

Abstract

Since the seminal work of Ball and Brown [1968] numerous studies have examined the association of both quarterly and annual earnings forecast errors and risk-adjusted stock prices.1 The research findings from these studies are consistent with the notion that there is a positive association between the signs of earnings forecast errors and risk-adjusted stock prices. Moreover, Beaver, Clarke, and Wright [1979] (hereafter BCW) also found an association between unsystematic security returns and the magnitude of annual earnings forecast errors over a 52week preannouncement period. They suggested that an important extension of their work would be to examine the association between the magnitude of quarterly earnings forecast errors and unsystematic returns. This is the primary focus of the present study.