The Impact of Split Adjusting and Rounding on Analysts' Forecast Error Calculations

Abstract

This study finds that analysts' forecast data files, commonly used by accountants and financial analysts to estimate market expectations about earnings announcements, contain inaccurate historical data for companies that split their common stock. These inaccuracies result because stock split adjustments are made retrospectively and split-adjusted data are rounded. Moreover, because well-performing firms are more likely to execute stock splits, the consequences of the stock split problem are systematic, potentially distorting both time-series and cross-sectional characteristics of forecast errors. The analysis also demonstrates that the problem can influence interpretations of security price reactions to earnings announcements. To illustrate this point, we report evidence suggesting that errors induced by rounding split-adjusted data alter conclusions about how investors interpret earnings that meet, but do not exceed, the consensus forecast.