On The Financial Characteristics Of Firms That Have Achieved The Highest Levels Of Accuracy In Earnings Predictability

Abstract

The value of a company is said to be a function of the future earnings or cash flows the company will produce discounted at a rate commensurate with risks associated with those cash flows. The subject of earnings predictability or the lack of reliable forecasts has been of interest to academic researchers and financial managers for years. Value Line publishes weekly, a ranking of the reliability of earnings predictions for every firm in their database. The higher the Value Line ranking for earnings predictability, the more likely they would recommend it as a safe investment. Earnings predictability is then, simply one of their important measures of potential value and safety.  The purpose of this study is to provide a financial analysis of those firms described by Value Line as having the most reliable levels of earnings predictability in their database. Specifically, the analysis will test for significant differences in the financial profiles of those firms that achieved the highest Value Line ratings for earnings predictability, and companies selected at random from the same industries.  A unique financial profile is estab­lished for the highest rated group, and it is suggested that the profile may be used to identify firms that because of their financial nature are capable of producing the most accurate sales forecasts, and earnings predictability. As in previous studies of this nature Multiple Discriminant Analysis is used.