Recall that the Harvard Business School professors used regression to model the relative optimism (y) of the analysts' 3-month horizon forecasts. The following model was fit to data collected on 11,121 forecasts: E(y) = β0 + β1x1 + β2x2 + β3x3, where
x1 = {1 if the analyst worked for a buy-side firm, 0 if the analyst worked for a sell-side firm}
x2 = number of days between forecast and fiscal year-end (i.e., forecast horizon)
x3 = natural logarithm of the number of quarters the analyst had worked with the firm
a. The coefficient of determination for the model was reported as R2 = .069. Interpret this value.
b. Use the value of R2 in part a to conduct a test of the global utility of the model. Use α = .01.
c. The value of β1 was estimated as 1.07, with an associated t-value of 4.3. Use this information to test (α = .01.) whether x1 contributes significantly to the prediction of y.
d. The professors concluded that "after controlling for forecast horizon and analyst experience, earnings forecasts by the analysts at buy-side firms are more optimistic than forecasts made by analysts at sell-side firms." Do you agree?
For Information: Refer to the Financial Analysts Journal (Jul./Aug. 2008) comparison of earnings forecasts of buy-side and sell-side analysts, Exercise 12.74.