Daily Academic Alpha: Crowdsourced Alpha?
Crowdsourcing — when a task normally performed by employees is outsourced to a large network of people via an open call — is making inroads into the investment research industry. We shed light on this new phenomenon by examining the value of crowdsourced earnings forecasts. Our sample includes 51,012 forecasts provided by Estimize, an open platform that solicits and reports forecasts from over 3,000 contributors. We find substantial accuracy benefits from combining IBES and Estimize forecasts at all horizons. These benefits are robust to controlling for difference in forecast horizon and forecast bias. Also, the Estimize consensus is a better proxy for the market expectation than the IBES consensus. Finally, Estimize consensus revisions generate significant two-day size-adjusted returns. The combined evidence suggests that crowdsourced forecasts are a useful, supplementary source of information in capital markets.
Recent research has begun to question the importance of forecasts to sell-side analysts. Prior research established the co-existence of longer horizon optimism and short-term pessimism in sell-side forecasts. These factors motivate us to explore a new phenomenon – crowdsourcing, as an alternative source of forecasts. We obtain revenue and earnings forecasts from estimize, an entity which crowdsources and distributes these forecasts online. We find the estimize forecasts are, on average, as accurate as the sell-side. Further, although our results show the estimize forecasts to be relatively more optimistic, on average, and particularly in short horizons, our analysis suggest it is at least partially explained by the extreme pessimism of the sell-side’s final forecasts. Our market test confirms support for the superiority of estimize’s short-term forecasts. Our results provide support for the value of crowdsourced forecasts.
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Definitions of common statistics used in our analysis are available here (towards the bottom)