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Abstract
A study of Value Line quarterly earnings forecast errors from 1999 through Q3 2016 shows that the direction of forecast bias and forecast efficiency with respect to earnings news depend on investment rating. Patterns of bias and inefficiency indicate that Value Line analysts are primarily motivated to maintain credibility with investors than to appease company managers. For Buy-rated stocks, forecast bias is pessimistic, and forecasts are inefficient with respect to good earnings news. When news is bad for Buy-rated stocks, forecasts are unbiased and efficient. For Sell-rated stocks, forecast bias is optimistic, and forecasts are inefficient with respect to bad earnings news. When news is good for Sell-rated stocks, forecasts are unbiased and efficient. © 2017 Academy of Financial Services. All rights reserved.
Jel classification: G11; G14
Keywords: Value Line; Earnings forecasts; Earnings management; Earnings forecast bias; Earnings forecast inefficiency
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1. Introduction
With roots dating to 1931, Value Line, Inc. (symbol: VALU) provides independent investment research that for many years has had substantial influence with individual investors. Value Line's core business is producing investment periodicals and underlying research, and its target audiences are individual investors, colleges, libraries, and investment management professionals. In its annual report for 2016, Value Line, Inc. reported total revenue from investment periodicals and related publications of $34.5 million. Its flagship publication, the Investment Survey, has been published weekly since 1965. It has been recognized by Hulbert Financial Digest in its Newsletter Honor Roll, most recently in 2016. The Investment Survey delivers the research and ratings of Value Line's analyst team for 1,700 public companies, which comprise roughly 90% of the market capitalization of U.S. common stocks. Investment ratings are conveyed by Value Line's Timeliness Rating System, which ranks stocks for relative 6-to-12-month-ahead stock price performance. The performance of Value Line's Timeliness ratings has been referred to in prior research as the "Value Line enigma." In addition, the Investment Survey delivers both short- and long-term forecasts of 23 financial variables for the companies in its coverage universe. Although investors spend tens of millions of dollars annually subscribing to Value Line publications, relatively little has been reported about the quality of the financial forecasts produced by the company's analysts. The aim of this article is to...