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The Effects of Recessions on Earnings Forecasts and Fundamental Signals
Journal article   Peer reviewed

The Effects of Recessions on Earnings Forecasts and Fundamental Signals

Sherwood Lane Lambert
International journal of business, Vol.26(2), pp.28-48
03/22/2021
Web of Science ID: WOS:000751660700003

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Abstract

We study the effects of the three recessions during 1990-2009 on analysts' next-year EPS forecasts. We find 10 of the 17 forecast-year/forecasted-year pairs studied have the expected inverse relationship between utilization of fundamental signals and forecast error rates when the forecast and forecasted years are outside the recessions' period ranges. Similarly, we find this inverse relationship exists for 2006-2007 and 2007-2008 that are wholly within The Great Recession timeframe. These results are consistent with an inverse relationship existing during periods of extended economic growth or prolonged recession that span the forecast reference year and the realization of the next-year, forecasted EPS. For 1991-1992 when the Gulf War Recession affected the 1991 fundamental signals, and 2001-2002 when the 9/11 Recession affected the 2001 fundamental signals, we find both forecast error rate and efficient utilization of the fundamental signals decreased. We find comparable results for analysts' long-term earnings growth forecasts.

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