A comparison of investors' and analysts' efficiency in incorporating accounting information

Abstract

In this study, we compare the relative efficiency of investors and sell-side analysts in using various accounting information to predict future earnings. Our results indicate that the equity- value estimates inferred from the analysts' earnings forecasts are more biased than the stock prices in interpreting stock price momentum, accruals, and the growth in long-term net operating assets. Therefore, we conclude that sell-side analysts are generally less efficient than investors in incorporating certain accounting information. Thus, investors may not be able to mitigate their mispricing of certain accounting information by fixating on analysts' earnings forecasts as a benchmark for their earnings expectation.