Analysts’ GAAP Earnings Forecast Quality: Implications for Research

We examine the quality of analysts’ GAAP earnings forecasts and consider implications for research that uses these forecasts as inputs. We first exploit a small sample setting that allows for a clean identification of GAAP earnings forecast quality. We find that GAAP earnings forecasts generally fail to incorporate a known event with an estimable GAAP earnings impact and are not a good proxy for investor expectations of GAAP earnings. Both findings cast doubt on the quality of GAAP earnings forecasts. We assess the implications of these findings for two research applications using a comprehensive sample of GAAP earnings forecasts spanning 2004 to 2020. We find that low quality GAAP earnings forecasts dampen GAAP earnings response coefficients and increase the percentage of firm-quarters classified as meeting-or-beating via exclusions. We illustrate two empirical strategies that researchers can implement to mitigate the adverse effects of low quality GAAP earnings forecasts on research inferences.