areexpecting its earningsgrowthto be over the nextfive
years.
Information Advantages
Thereareanumberofreasonstobelievethatanalystforecasts
of growth should be better than using historical growth rates.
- Analysts,inadditiontousinghistoricaldata,canuse
informationthat hascome out aboutboth thefirm
andtheoveralleconomysincethepreviousearnings
reporttomakepredictionsaboutfuturegrowth.This
information can sometimes lead to significant
reevaluation of the firm’s expected cash flows. - Analystscanalsoconditiontheirgrowthestimatesfor
a firmon information revealedby competitors on
pricing policy and future growth. For instance, a
negativeearningsreportbyonetelecommunications
firmcanleadtoareassessmentofearningsforother
telecommunications firms. - Analysts sometimes have access to private
informationaboutthefirmstheyfollowthatmaybe
relevant in forecasting future growth. This avoids
answering the delicate question of when private
information becomes illegal inside information.
There is no doubt, however, that good private
informationcanleadtosignificantlybetterestimates
offuturegrowth.Inanattempttorestrictthistypeof
information leakage, the Securities and Exchange
Commission(SEC)issuednewregulations(RegFD)
in 2000 preventing firmsfrom selectivelyrevealing
informationto a fewanalystsorinvestors. Outside