Reported Earnings and Analyst Forecasts as Competing Sources of Information: A New Approach

We study information flows between earnings and forecasts, using suitably adapted Granger causality tests. This approach complements existing cross-sectional studies by abstracting from stock market reactions to information, and focussing on dynamic interactions between information flows instead. We find bi-directional causality in timeseries of analyst earnings forecasts and reported earnings, supporting our expectation that forecasts contribute to information that is reflected in future reports. Further, our evidence of feedback suggests that past reports and forecasts are both reflected in future forecasts, implying that the information in reports has inherent value, and that forecasts do not fully substitute for reports.