Chapter 12.8, Problem 12.90ACB

Buy-side vs. sell-side analysts’ earnings forecasts. Refer to the Financial Analysts Journal (July/August 2008) comparison of earnings forecasts of buy-side and sell-side analysts, Exercise 12.74o {p. 732). Recall that the Harvard Business School professors used regression to model the relative optimism (y) of the analysts’ 3-month horizon forecasts. The following model was fit to data collected on 11,121 forecasts: E(y) = β₀+β₁x₁ + β₂x₂ + β₃x₃, where

x₁={1 if the analyst worked for a buy-side firm, 0 if the analyst worked for a sell-side firm}

x₂=number of days between forecast and fiscal year-end (i.e., forecast horizon)

x₃=natural logarithm of the number of quarters the analyst had worked with the firm

1. a. The coefficient of determination for the model was reported as R² = .069. Interpret this value.
2. b. Use the value of R² in part a to conduct a test of the global utility of the model. Use α =.01.
3. c. The value of β₁ was estimated as 1.07, with an associated t-value of 4.3. Use this information to test (α = .01.) whether x₁ contributes significantly to the prediction of y.
4. d. The professors concluded that “after controlling for forecast horizon and analyst experience, earnings forecasts by the analysts at buy-side firms are more optimistic than forecasts made by analysts at sell-side firms.” Do you agree?