AN EMPIRICAL STUDY OF THE RELATIONSHIP BETWEEN EARNINGS FORECASTS AND RISK PROFILE

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Abstract

A new approach to examine the relationship between the excess of forecast based on characteristics toward management forecast and business risk is provided in this research at companies listed on the stock exchange in Tehran.The customary (traditional (approach is based on the regression of management forecast errors of past years. Therefore, the observable and unobservable inputs, such as managements, incentive misalignment, are used to predict management forecast errors. In this study, the future earnings is at first estimated by using characteristics including earnings per share, loss indicator, Neg. accruals per share , Pos. accruals per share ,asset growth , dividend indicator (non-payment of the dividend), Book-to-market value, share price and dividend per share for companies. Based on that, a criterion (CO) for estimating the earnings forecast error was developed, which is the alternative forecasted errors. One should notice that, business risk is considered as a measure of company performance. In this study, measures of business risk are volatility of earnings and dividend ratio. Research findings show that, there is a significant relationship between the CO and volatility of earnings, on the contrary there is no significant relationship between this criteria and dividend ratio.

Keywords: Earning Forecast, Business Risk, Management Forecast Error

How to cite this paper: Malekian, E., & Vahdani, M. (2016). An empirical study of the relationship between earnings forecasts and risk profile. Risk governance & control: financial markets & institutions, 6(4-2), 274-281. https://doi.org/10.22495/rgcv6i4c2art4