Huberts and Fuller (1995)

Reference

Predictability Bias in the U.S. Equity Market^aa

Lex Huberts and Russell J. Fuller

Financial Analysts Journal, (March-April, 1995), 12-28.

Synopsis

This paper shows that firms with less predictable earnings in the past tend to have inferior earnings and stock returns in the future. Predictability is measured using the absolute values of the consensus analyst forecast errors for the past three quarters. Firms with less predictable earnings are shown to miss future earnings forecasts by greater amounts and have lower subsequent stock returns. The annual hedge portfolio return to longing firms with the most predictable earnings and shorting firms with the least predictable earnings is around 8%.