FIRM’S DEGREE OF UNCERTAINTY and EARNINGS FORECASTS

Abstract

This study examines the relationship between earnings forecasts and task uncertainty. Company uncertainty is applied as a proxy for task difficulty and is investigated in terms of its effect on analysts’ forecasts in three aspects: forecast accuracy, the optimism degree of the forecast, and the timely response to public information. The current study concludes that company uncertainty is positively related to forecast inaccuracy, positively related to the analysts’ forecast optimism level, and is negatively related to revision timeliness. This finding suggests that if a company has a high uncertainty, then predicting the company’s future earnings is difficult for financial analysts. Furthermore, when new public information is released (such as an earnings announcement), much time is needed to interpret this new information and to revise prior forecasts. We contribute to extant literature in the following ways: First, this study clarifies the effect of firm uncertainty on analyst performance. Second, we remind investors to be careful when taking an analyst’s research reports as a reference for investment decisions.