Extracting Forward-Looking Information from Security Prices : A New Approach

This paper proposes a new index to extract forward-looking information from security prices and infer market participants' expectations of future earnings. The index, called market-adapted earnings (MAE), utilizes stock returns and fundamental accounting signals to estimate market expectations of future earnings at the firm level. MAE outperforms time-series models (e.g., random walk) in predicting future earnings. Results demonstrate the usefulness of MAE for firms with no analyst following