Chapter 2And You Thought Earnings Are the Bottom Line

The Lucrative Earnings Prediction

Forecasting corporate earnings (income) is a major endeavor of financial analysts, whether working for investment banks and independent outfits (sell-side analysts) or hedge funds and private equity firms (buy-side analysts). Financial (accounting) information is, of course, an important input into the earnings forecast models. Analysts use these forecasted earnings to form their stock recommendations to clients1 and these forecasts also serve as the main benchmark—the consensus estimate—to evaluate corporate performance. Analysts' earnings forecasts (estimates), therefore, exert both direct and indirect effects on the equity investment decisions of most investors.

Many corporate managers play an active role in analysts' earnings forecasts by assisting (guiding) analysts in the prediction of sales and earnings. ...

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