Analyst's earnings forecasts horizon, firm value and future stock returns

[Purpose] This study examines how the horizon of financial analysts’ earnings forecasts relates to firm value and future stock returns. While prior studies focus on forecast accuracy and bias, little attention has been paid to forecast horizon—the length of time into the future for which earnings projections are issued. We investigate whether longer forecast horizons enhance firm value by improving the information environment or instead induce temporary mispricing due to optimistic bias. [Methodology] Using a sample of U.S. firms from 1992 to 2021, we construct a firm-level measure of forecast horizon based on analysts’ quarterly earnings forecasts from the I/B/E/S database. We examine the association between forecast horizon and firm value using Tobin’s Q, and analyze its relation to future stock returns over the subsequent 12 months. We further assess whether analyst coverage moderates these relationships. [Findings] We find that forecast horizon is positively associated with contemporaneous firm value, suggesting that firms followed by analysts issuing longer-horizon forecasts are valued more highly. However, forecast horizon is negatively related to future stock returns, indicating that such valuations tend to reverse over time. This negative return predictability is significantly weaker for firms with greater analyst coverage. [Implications] Our findings suggest that forecast horizon plays a dual role in capital markets: it can enhance firm value by improving information availability, but it may also contribute to temporary overvaluation when optimistic bias is not fully recognized. Forecast horizon is therefore an important yet underexplored dimension of analyst behavior with implications for valuation and asset pricing research.