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- Title
THE DIFFERENTIAL ASSOCIATION OF FORECAST ERROR AND EARNINGS VARIABILITY WITH SYSTEMATIC RISK.
- Authors
Barefield, Russell M.; Comiskey, Eugene E.
- Abstract
This article presents a study which devised a procedure to test for a difference in association of corporate earnings forecast errors and historic earnings variability with systematic risk. The significance of the rejection of hypothesis two seems quite clear and is exactly in line with the implications of the Litzenberger-Rao statement which opens this paper. When a firm's earnings are either more or less forecastable than they are variable (either positive or negative divergence measures of relatively large size), then the systematic risk of the company's common stock tracks forecastability more closely than variability. Again, in the words of Litzenberger and Rao. These results demonstrate what others have offered up as true without empirical support. In a sense the results may also constitute further support for the general concept of market efficiency. In assessing risk, the market appears to properly assess those situations in which earnings are either more or less forecastable than their historical earnings-variability would imply. Finally, the results provide one possible explanation for the generally weak results achieved where historic earnings variability has been used as a risk proxy in valuation and related studies. Forecast error, if available should improve the results of these or similar studies.
- Subjects
CORPORATE profits; STOCKS (Finance); CORPORATE finance; SECURITIES; FINANCIAL instruments
- Publication
Journal of Business Finance & Accounting, 1979, Vol 6, Issue 1, p1
- ISSN
0306-686X
- Publication type
Article
- DOI
10.1111/j.1468-5957.1979.tb01064.x