Individuals' Perceptions and Misperceptions of Time Series Properties of Quarterly Earnings

This study uses experiments to examine whether individuals' earnings forecasts correctly reflect the time series properties of quarterly earnings, in particular, the positive autocorrelation in seasonal quarterly changes and the negative fourth-order moving average term documented by Brown and...

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Bibliographic Details
Published in:The Accounting review 1996-07, Vol.71 (3), p.317-336
Main Authors: Maines, Laureen A., John R. M. Hand
Format: Article
Language:English
Subjects:
Accounting
Analytical forecasting
Autocorrelation
Autoregressive moving average
Correlations
Earnings
Earnings forecasting
Economic models
Hypotheses
Income distribution
Random walk
Regression coefficients
Seasonal variations
Studies
Term weighting
Time series
Time series forecasting
Time series models
Wage levels
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Summary:This study uses experiments to examine whether individuals' earnings forecasts correctly reflect the time series properties of quarterly earnings, in particular, the positive autocorrelation in seasonal quarterly changes and the negative fourth-order moving average term documented by Brown and Rozeff (1979). We find that individuals' forecasts are sensitive to the magnitude of these time series components; however, individuals typically underweight the moving average term and under- (over-)weight the most recent seasonal quarterly change when it has a strong (weak) effect on future earnings. Individuals also place slightly more weight on quarterly changes when earnings are reported relative to those four quarters prior. These results suggest that the documented stock market under-reaction to quarterly earnings may not hold universally; rather, it may be composed of under-reactions to firms with strong autocorrelation in seasonal changes and over-reactions to firms with weak autocorrelation in seasonal changes.
ISSN:0001-4826
1558-7967