Earnings forecasts impact equity valuation, book value gains importance.
The study looked at how closely analysts' predictions of future earnings match current earnings, and how this affects the importance of earnings and book value in determining stock prices. They found that when analysts' forecasts differ greatly from current earnings, current earnings become less important for stock prices. On the other hand, book value becomes more important in such cases. This measure of 'earnings persistence' based on analysts' forecasts is better at explaining differences in the importance of earnings and book value than historical earnings variability.