The Influence of Corporate Risk Exposures on the Accuracy of Earnings Forecasts
- Topics:
- Commercial Lending
- Tags:
- Analyst,
- Commodity Price,
- Earnings Forecast,
- Exchange Rate,
- Exposure,
- Finance,
- Financial Accounting,
- Free Trade,
- Interest Rate
- Source:
- Fisher College of Business
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Overview: This paper examines how corporations’ exposures to interest rates, exchange rates, and commodity prices are related to investors' and analysts' expectations about firms' earnings. The results indicate that investors and analysts encounter difficulties estimating the earnings effects of the risk exposures that companies face. Stock returns around earnings announcements are associated with the magnitude of both recent quarter and lagged shocks to interest rates, exchange rates and commodity prices, especially for firms with large ex-ante exposures to these risks. Although intra-quarter revisions to analysts' forecasts do incorporate information about the earnings effects of the risk shocks, analysts’ earnings forecasts do not fully resolve the uncertainty created by either recent quarter and lagged shocks. Overall, the results suggest that analysts resolve between 25%-60% of the total uncertainty created by interest rate, exchange rate, and commodity price shocks. The results are consistent with arguments that corporate financial risk exposures are not transparent to investors or analysts, and support recent research arguing that firms' hedging strategies consider this source of earnings uncertainty.
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Format: PDF | Size: 100KB | Date: Nov 2002 | Pages: 41
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