Usefulness of financial statement information in forecasting earnings of high-technology companies

Abstract

PURPOSE OF THE STUDY The purpose of this study is to examine whether financial statement information is useful in explaining and predicting the future earnings of high-technology companies. In addition, the study further analyzes whether the firm-specific uncertainty factors recognized by the prior literature are associated with the forecasting errors calculated from the hold-out sample.

DATA The data collection consists of 10 642 active and inactive high-tech companies of which 5 341 were listed during 1990-2010. High-tech industries were identified based on the U.S. Bureau of Labor Statistics research which emphasizes companies’ human effort on research and development (Hecker 2005). The earnings forecast model replicates the forecast model of Hou et al. (2010). The study was conducted as a cross-sectional analysis.

RESULTS The findings of the study indicate that basic financial statement information has explanatory power in association with future earnings based on the IPO sample during 1991-2010. Especially lagged earnings, dividends and accruals were identified to explain future earnings.

When analyzing the forecasting errors in the hold-out sample 2001-2010, the estimated earnings forecast model performed rather well in terms of the precision and bias of the forecasts. Forecasting errors slightly increased with the forecasting horizon. There were no substantial differences documented in the performance of forecasts for IPO and all listed high-tech companies.

The observed forecasting errors could not be explained by the generally recognized uncertainty factors and, therefore, the model should be cautiously applied in high-tech samples.