One indication of information usefulness is its ability to increase the precision of individuals' estimates of events of interest (FASB 1980; Ijiri and Jaedicke 1966). In this context, earnings reports are useful if they increase the precision of investors' forecasts of future earnings when the latter proxy for the event of interest, future cash flows. The cross-sectional variance of analysts' earnings expectations often is used as a proxy for the unobservable precision of their earnings estimates (Ajinkya and Gift 1985; Brown et al. 1987; Imhoff and Lobo 1992). We show that, when combined with the time-series properties of accounting earnings and prior research in analyst forecasts, Bayesian revisions suggest that year t earnings reports should, on average, increase the convergence of analysts' year t+1 earnings forecasts. Operationally, we examine whether the information contained in year t earnings decreases the cross-sectional variance of analysts' year t+1 forecasts. Morse et al. (1991) use I/B/E/S Summary data, and conclude that the information contained in year t earnings announcements increases the cross-sectional variance of analyst forecasts of year t+1. This is a surprising result. One feature of the I/B/E/S Summary data is that they do not contain dates of the analysts' earnings forecasts. Thus, researchers who use these data do not know the set of information upon which the analyst's earnings forecast is based. In contrast to the I/B/E/S Summary data, the I/B/E/S Detail data are precise regarding the date that the individual analyst' s earnings forecast entered the I/B/E/S system. We use I/B/E/S Detail data to reexamine the relation between annual earnings announcements and convergence of beliefs. Using the Detail data, we show that the information contained in year t earnings decreases the cross-sectional variance of analysts' earnings forecasts of year t+1. Moreover, our finding is insensitive to year of study. Using the Summary data, we find that the information contained in year t earnings increases the cross-sectional variance of analysts' earnings forecasts of year t+1, but this finding is sensitive to year of study. Morse et al. (1991) hypothesize and provide evidence that reduction in variance is less likely to occur when "standardized" surprise is large. Using the Detail data, we show that significant decreases in variance occur for the seven smallest deciles of standardized surprise, and that significant increases in variance occur only for the largest decile. Using the Summary data for the same "window" as the Detail data, we find no deciles of standardized surprise associated with significant decreases in variance, and we observe significant increases in variance for the three largest deciles of standardized surprise. In sum, our results using I/B/E/S Detail data suggest that, on average: (1) annual earnings announcements increase convergence of analysts' forecasts of firms' future earnings; (2) annual earnings announcements decrease convergence only for the largest decile of earnings surprise. In contrast, we do not obtain consistent results with I/B/E/S Summa data.
