Paper Title
Exploring Whether Security Analysts Incorporate Non-Permanent Items in Their Current-Year Earnings Forecasts

Abstract
This paper provides evidence consistent with the notion that security analysts incorporate value-irrelevant or non-persistent components of earnings in their one-year-ahead earnings forecasts (FY1s). Such conduct, which appears to jeopardize the informativeness of these forecasts, may result from investors’ viewing more positively those analysts who provide more accurate and fewer inaccurate forecasts. Specifically, we identify non-recurring value-relevant and value-irrelevant components of earnings. The former type of components proxied by this study as the sum of Special Items and Foreign Exchange Gains and Losses, consisting of the one-time account items, may contribute to reducing the value relevance of earnings. As for the potentially value-irrelevant ones, this study adopts a proxy of discretionary accruals (DA), conjecturing that managers’ strategic manipulation also contributes to the transitory nature, at least in part, of accounting earnings. Accordingly, for firms with substantial non-permanent earnings items, the FY1s may not deserve investors’ exclusive attention among all analyst forecasts including the ones with long horizons.Our result is consistent with the notion that analysts reduce forecast error in near-term forecasts at the expense of the implication for future earnings of FY1, and is against the exclusive reliance on FY1 in valuation models. Consistent with the imperfection of current-year earnings forecasts in explaining firm value, this paper shows that the number and proportion of analyst long-term forecasts have been increasing in recent decades. This study contributes to the academic literature by its identifying its roles been played by with his/her forecasts of various horizons, showing that a near-term forecast such as FY1 may fail to represent his/her valuation judgments or reflect his/her predictability. This paper examines the relationships among analyst forecasts and accounting earnings items. The forecast level tests consistently demonstrate that analysts accommodate non-permanent earnings into current-year forecasts; in other words, they cast doubt on the effectiveness of a near-term forecast in conveying firm value-relevant insights. Keywords - Analysts; Discretionary Accruals; Earnings Forecasts; Non-recurring Earnings JEL Classification: G17; G24; M41