sealPurdue News

May 1998

Study: 'Whispers' shouting
all the way to Wall Street

WEST LAFAYETTE, Ind. -- Wall Street "whispers" are speaking louder than ever to the financial community.

A study of "whisper forecasts," the unofficial corporate earnings forecasts that circulate among traders and investors, concludes that the whispers tend to be more optimistic and often more accurate than traditional earnings forecasts.

The study, by Susan Watts, assistant professor of management at Purdue University, Mark Bagnoli, visiting associate professor of finance at the University of Michigan, and Messod Daniel Benish, associate professor of accounting at the Kelley School of Business at Indiana University, will be presented at a conference in Hong Kong in June.

"The whisper forecasts have been around since about 1994," Watts says. "But, as far as we know, ours is the first in-depth study of the phenomenon." The whisper forecasts, the researchers found, are generally associated with high-performing, high-technology stocks.

Watts and her colleagues compared 943 whisper forecasts, culled mostly from Web sites and electronic bulletin boards, and more than 3,500 traditional analyst forecasts (provided by First Call Corp., a division of Thomson Financial Services) for the same 127 firms over a period from January 1995 to May 1997. The sample contained a large number of technology stocks.

"These tend to be young, fast-growing technology companies that don't have a lot of history, " Watts says. "That makes the earnings statement an important piece of information. Our study finds that analysts contributing to the First Call network tend to be pessimistic when forecasting earnings for our sample firms. So, we suspect the proliferation of whisper forecasts, which tend to be more optimistic, is the 'street response' to undo those under-estimations. The whispers are described by professionals as increasingly becoming the true market expectation of earnings."

The researchers speculate that the whisper forecasts are more accurate because they may contain information not incorporated in traditional analysts' forecasts and because they circulate closer to the time of the release of the actual earnings statement.

For example, Watts says the analysts' forecasts often were released on First Call during the first week of a new quarter, with revisions of forecasts occurring relatively infrequently. "The whisper forecasts generally will begin to circulate much later," she says. "They appear a week or two before the end of the quarter, and closer to the release of the actual earnings statement.

"The whisper timing, perhaps, allows for a more accurate earnings-per-share estimate for traders and investors. So investors may find it useful to acquire whispered numbers for transactional decisions, particularly if they are interested in high-technology stocks."

The research team also found that the whispered forecasts are widely enough disseminated that they have the potential to affect stock prices before the official earnings release.

Stan Levine, director of quantitative research at First Call Corp., manages the firm's academic program that contributed the data to the three researchers. He agrees that the whisper forecast is a financial phenomenon.

First Call provides support for university research projects across the country. "But this project interested me because it's the first research project I know of on whisper forecasts," he says. "There seems to be a subset of investors out there who have both the knowledge and the time to post these whispers on the Internet."

Levine says, that while he finds the phenomenon fascinating, he has concerns about the whispers.

"We really don't know where these forecasts originate from, so validity is a concern," he says. "They can show up on the Internet or on the bathroom wall."

He says one possibility is that the information is coming from the companies themselves. "But they have established ways of guiding analysts' earnings forecasts that include pre-earnings announcements before the earnings reports are published, and communications with securities analysts," he says.

Levine says the whispers also could be coming from investors who have learned information from advisers or analysts and then take it upon themselves to post the information on the Web. "But, since there are no authors listed, these are the kinds of numbers that could be fraudulently disseminated," he says.

Valid or not, Watts says, the whispers are making their way more and more into the business press and onto Web pages worldwide.

Sources: Susan Watts, (765) 494-4504; e-mail,
Stan Levine, (212) 484-4705; e-mail,
Writer: Kate Walker, (765) 494-2073; e-mail,
Purdue News Service: (765) 494-2096; e-mail,

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