Can analysts forecast profit warnings?

In this paper, analysts’ forecasting ability is tested by studying if analysts are able to predict profit warnings. Before a profit warning is issued, the gap between performance and expectations has usually been increasing for some time. Examining the continuous information flow, analysts should have a fair chance to detect this deviation from expectations. The sample consists of 367 profit warnings from firms listed on the exchanges of Nasdaq OMX Nordic. The profit warnings are from years 2005-2011 and include 98 positive warnings (upgrades to expectations) and 269 negative warnings (downgrades to expectations). Based on the analysis, analyst recommendations start to drift in the direction of the warning about 29 weeks before its publication. The results show that analysts have (at least some) forecasting ability – something which has been questioned by several recent studies.