Economic policy uncertainty and analysts’ forecast characteristics

• Published in: Journal of accounting and public policy 2021-07, Vol.40 (4), p.106775, Article 106775
• Main Authors: Chourou, Lamia, Purda, Lynnette, Saadi, Samir
• Format: Article
• Language: English
• Subjects: Analyst forecast; Analysts; Companies; Cross-sectional studies; Earnings; Earnings forecasting; Economic conditions; Economic policy; Economic policy uncertainty; Errors; Forecasting; Heterogeneity; Information environment; Quality control; Uncertainty
• ISSN: 0278-4254; 1873-2070
• DOI: 10.1016/j.jaccpubpol.2020.106775

•We examine the influence of economic policy uncertainty (EPU) on the characteristics of analysts’ earnings forecasts over the period 1985–2015.•We find that EPU has a significant and persistent influence on the information environment that is distinct from other sources of uncertainty, such as national elections.•We establish that analysts’ forecast errors increase with EPU, as does the degree of forecast dispersion regardless of analysts’ level of expertise and size of their brokerage houses.•Analysts appear to struggle with forecast accuracy for both policy sensitive and policy neutral firms.•EPU makes earnings more difficult for analysts to predict, suggesting that users of these forecasts should increase their skepticism during periods of elevated EPU. We examine the influence of economic policy uncertainty (EPU) on the characteristics of analysts’ earnings forecasts over a thirty-year period, spanning a wide variety of political and economic conditions. Motivated by both theory and empirical evidence that suggest a decline in the quality of the information environment for firms as EPU increases, we establish that analysts’ forecast errors increase with EPU, as does the degree of forecast dispersion. Increased error and dispersion persist after controlling for several competing sources of economy-wide uncertainty. Cross sectional analysis exploring heterogeneity in forecast quality across both analyst and firm characteristics establishes that forecast error and dispersion increase with EPU across a broad spectrum of firms and levels of analyst expertise. We control for analysts’ experience overall and the years spent covering a particular industry and firm. Five alternative methods for classifying firms as policy sensitive versus policy neutral provide consistent evidence that analyst forecast errors and dispersion increase with EPU, even for firms not deemed to be particularly sensitive to policy.