Diversified Companies and Analysts’ Earnings Forecasts

Abstract

This article demonstrates that a company’s industry diversification has a detrimental effect on financial analysts’ ability to forecast earnings. The results also show that a company’s unrelated and related industry diversification have differential impacts on analysts’ earnings forecast difficulty. These results have implications for investors in the stocks of highly diversified firms (e.g., General Electric). They should be wary of using analysts’ earnings forecasts in their investment decisions, because the forecasts for diversified firms tend to be less accurate and there tends to be greater disagreement among the analysts who follow these firms.

TOPICS: Security analysis and valuation, statistical methods, exchanges/markets/clearinghouses