Exploration expenditure and analysts' forecasts

Purpose: This study investigates the effect of uncertainty associated with exploration expenditures on properties of analysts’ forecasts. Specifically, this study examines whether inherent uncertainty associated with exploration expenditures reduces analysts’ forecast accuracy, and increases analysts’ forecast dispersion. Originality: Despite the widespread interest in analysts’ earnings forecasts, prior research has not yet investigated the association between resource companies’ exploration expenditures and properties of analysts’ earnings forecasts, notwithstanding the greater demand by investors for analyst guidance because of the inherent uncertainty about the payoffs to exploration investments. This study provides evidence on how well analysts’ forecasts convey information about exploration expenditures for resource companies. Key literature / theoretical perspective: Analysts are considered to be sophisticated users of financial accounting information, and their role is to act as information intermediaries in enhancing the information efficiency of capital markets (Schipper, 1991). This role may be especially important for resources companies with exploration activities, to which the payoffs can be potentially large but are inherently uncertain. The inherent uncertainty of exploration investments creates an information void that analysts seek to fill through their private information acquisition activities as current earnings may be less useful for predicting future performance. Assessing the impact of exploration expenditures on resource companies’ future prospects requires expertise and the collection and process of information beyond the financial statements. Investors who lack expertise and information access will enhance greater demand for analyst research, but analysts are required to invest more resources in acquiring information.