Do management forecasts of earnings affect stock prices in Japan?

One of the major differences that has attracted a great deal of attention is the relatively high average price/earnings (PE) ratio for the stocks listed on the Tokyo Stock Exchange. A question sometimes raised in the popular press is whether the difference in PEs suggests that US stocks are undervalued or Japanese stocks are overvalued.1 Of course, such conjectures are not well-founded unless we understand the differences in the institutional characteristics of the two markets. Some of the differences raise subtle but important questions, such as whether a particular institutional arrangement can be adopted in other environments. Just as we have seen the transfer of US accounting practices to non-US companies active in international capital markets, certain institutional characteristics of Japan's capital markets might lead to related changes in other countries. This paper considers one such characteristic, management forecasts, which we believe to be a likely candidate for such a global transfer

A Positive Model of Earnings Forecasts: Top Down versus Bottom Up

This article analyzes the behavior of two groups of corporate earnings forecasters: analysts, who follow individual company fortunes, and market strategists, who predict earnings for various company aggregates. Using data for two market indices, the S&P 500 and the Dow Jones Industrial Average, we document that bottom-up forecasts are systematically more optimistic than top-down forecasts made by strategists. This difference is not driven by the difference in the forecast target. This finding may be explained by the incentives that analysts face and/or by cognitive bias.