INDIVIDUALS PERCEPTIONS AND MISPERCEPTIONS OF TIME-SERIES PROPERTIES OF QUARTERLY EARNINGS

This study uses experiments to examine whether individuals' earnings f orecasts correctly reflect the time series properties of quarterly ear nings, in particular, the positive autocorrelation in seasonal quarter ly changes and the negative fourth-order moving average term documente d by Brown and Rozeff (1979), We find that individuals' forecasts are sensitive to the magnitude of these time series components; however, i ndividuals typically underweight the moving average term and under- (o ver-)weight the most recent seasonal quarterly change when it has a st rong (weak) effect on future earnings. Individuals also place slightly more weight on quarterly changes when earnings are reported relative to those four quarters prior, These results suggest that the documente d stock market under-reaction to quarterly earnings may not hold unive rsally; rather, it may be composed of under-reactions to firms with st rong autocorrelation in seasonal changes and over-reactions to firms w ith weak autocorrelation in seasonal changes.