Value of Accounting Numbers and Analysts' Forecast Errors

The occurrence of accounting manipulation and creative accounting practices have consequently reduced the value of accounting numbers in the form of decreased earnings quality. Analysts use these reported earnings to make appropriate predictions and as such the underlining principles of the financial statements under review influence the forecast accuracy or otherwise. Thus, in this present study, the effect of earnings quality was examined on EPS forecast errors. This was achieved in three stages, firstly, the EPS forecast were determined using Panel Vector Auto-regressive model of order 2 (AR (2)); secondly, the modified Dechow and Defond accrual quality model by Francis, LaFond, Olsson, and Schipper was used to obtain the earnings quality; and thirdly, the earnings quality derived was regressed against forecast errors along with other firms’ characteristics as control variables. Data were gathered from 10 sampled firms selected at random for the 10 year period of 2005 to 2014. Pre-estimation and post estimation tests were conducted on the series and the final regression estimate reveal that firm’s value measured by Tobin’s q and earnings quality have negative effect on forecast errors. It was therefore concluded that, accrual quality a measure of earnings quality have a negative effect on EPS forecast errors. Implying that the higher the quality of earnings, the lesser the EPS forecast errors. It was recommended that financial analysts should strive towards understanding the quality of earnings reported before forecasting EPS.