In this paper we provide evidence on the relationship between revisions in analysts' composite earnings forecasts and contemporaneous stock price movements. Most of the research on forecasts of accounting earnings has focused on (1) whether earnings forecasts have information content, and (2) the pros and cons of regulations (standards) requiring earnings forecasts (Gonedes, Dopuch, and Penman [1976]). The second issue is moot if earnings forecasts do not contain information. Empirical evidence suggests that management earnings forecasts are associated with significant security price revisions (Foster [1973], Patell [1976], Nichols and Tsay [1979], and Penman [1980]). Similar results were obtained for analysts' forecasts (Gonedes, Dopuch, and Penman [1976]). One aspect of this area of research which has been neglected is the relationship between analysts' forecasts and managements' forecasts. Normally, corporations do not issue public forecasts of accounting data on a regular basis.' However, security analysts are in frequent contact with corporations in an effort to confirm information or obtain new

ABSTRACT: Bond raters are unique in their exposure to management forecasts. They regularly review ratees' confidential forecasts for new and ongoing bond issues. This study gives evidence that bond raters have developed great sensitivity to subtle differences in forecasts-supporting the inferences that forecasts are used in the rating process and that the rating environment fosters expertise development. In experiments which measured responses to confirming and disconfirming evidence (in the form of various forecast trends), bond raters changed their evaluations of ratees when forecast data were introduced. These results are consistent with bond raters having developed sharply defined knowledge structures (schemata) through their information exposure, feedback, and reward systems. In addition, bond raters demonstrated the other expertise attributes of high levels of consensus and confidence.

[Bond raters are unique in their exposure to management forecasts. They regularly review ratees' confidential forecasts for new and ongoing bond issues. This study gives evidence that bond raters have developed great sensitivity to subtle differences in forecasts-supporting the inferences that forecasts are used in the rating process and that the rating environment fosters expertise development. In experiments which measured responses to confirming and disconfirming evidence (in the form of various forecast trends), bond raters changed their evaluations of ratees when forecast data were introduced. These results are consistent with bond raters having developed sharply defined knowledge structures (schemata) through their information exposure, feedback, and reward systems. In addition, bond raters demonstrated the other expertise attributes of high levels of consensus and confidence.]

Examines the effect of the uncertainty in analysts' earnings forecasts on the relation between unexpected returns (UR) and unexpected earnings (UE). Review of related research; Description of measures and research methodology; Model for controlling ex ante uncertainty; Implications of the study.