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Analyst Forecast Properties, Financial Distress, and Business Risk

This study examines the validity of using analyst forecast properties to proxy for information quality. The results suggest that dispersion and error measures are strongly related to financial distress and business risk. Firms with losses, earnings declines, and volatile earnings have a strong tendency towards high dispersion and error. Furthermore, forecast biases are predictable. Firms with low dispersion or error measures have relatively little forecast optimism, while firms with high dispersion or error measures have high amounts of forecast optimism. This finding is driven by loss firms, which tend to have greater dispersion and error. Caution should thus be employed when using dispersion and error measures to proxy for the quality of the information environment.