Economic policy uncertainty and analysts’ forecast characteristics |
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| Institution: | 1. Telfer School of Management, University of Ottawa, 55 Laurier Avenue East, Ottawa, ON K1N 6N5, Canada;2. Smith School of Business, Queen’s University, 143 Union Street West, Kingston, ON K7L 3N6, Canada;3. IPAG Business School, 184 Boulevard Saint-Germain, 75006 Paris, France;1. School of Business, University of Connecticut, 2100 Hillside Rd., Unit 1041A, Storrs, CT 06269, United States;2. College of Business, Colorado State University, 501 W. Laurel St., Fort Collins, CO 80523, United States;1. Oregon State University, United States;2. Purdue University, United States;1. Hong Kong University of Science and Technology, Hong Kong, China;2. Institute of Accounting and Finance, Shanghai University of Finance and Economics, China;3. Guanghua School of Management, Peking University, China;4. SILC Business School, Shanghai University, China;1. Kindai University, Faculty of Business Administration, 3-4-1 Kowakae, Higashiosaka City, Osaka 577-8502 Japan;2. Kobe University, Graduate School of Business Administration, 2-1 Rokkodai, Nada, Kobe, Hyogo 657-8501, Japan;1. Data & Text Mining Laboratory, Jerusalem School of Business Administration, Israel;2. Rutgers Business School – Newark and New Brunswick, Rutgers University, Department of Accounting and Information Systems, United States;3. Stern School of Business Administration, New York University and, QMA LLC, United States;4. Freeman College of Management, Bucknell University, United States |
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| Abstract: | 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. |
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| Keywords: | Economic policy uncertainty Analyst forecast Information environment G14 G18 G24 P16 |
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