An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Sudipta Basu
Emory University

Stanimir Markov
Emory University

Lakshmanan Shivakumar
Ldndon Business School

Abstract: We examine whether financial analysts fully incorporate expected inflation in their earnings forecasts for individual stocks. We find that expected inflation proxies, such as lagged inflation and forecasts from the Michigan Survey of Consumers, predict future earnings growth of a portfolio long in high SUE firms and short in low SUE firms, but analysts do not fully adjust for this relation. Analysts’ earnings forecast errors can be predicted using expected inflation proxies, and these systematic forecast errors are related to future stock returns. We conclude that, similar to investors, financial analysts do not fully incorporate the effects of inflation in their earnings forecasts.

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