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1
Keung, Edmund C. "Do Supplementary Sales Forecasts Increase the Credibility of Financial Analysts’ Earnings Forecasts?" Accounting Review 85, no. 6 (November 1, 2010): 2047–74. http://dx.doi.org/10.2308/accr.2010.85.6.2047.
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ABSTRACT: This study examines whether the market reacts more strongly to earnings forecast revisions when financial analysts supplement their earnings forecasts with sales forecasts. I find that earnings forecast revisions supplemented with sales forecast revisions have a greater impact on security prices than do stand-alone earnings forecast revisions, controlling for the incremental information content in sales forecasts. Supplemented earnings forecasts are more accurate ex post, controlling for other individual analyst characteristics. Results are robust to controlling for earnings persistence and time effects. Taken as a whole, financial analysts are more likely to supplement their earnings forecasts with sales forecasts when they have better information. Supplementary sales forecasts appear to lend credibility to earnings forecasts because financial analysts provide sales forecasts when they are more informed.
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Wawryszuk-Misztal, Anna. "Earnings forecasts errors in prospectuses: evidence from initial public offerings on the Warsaw Stock Exchange." Equilibrium 12, no. 2 (June 30, 2017): 229. http://dx.doi.org/10.24136/eq.v12i2.12.
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Research background: Several studies investigated the issue of accuracy of earnings fore-casts disclosed in IPO prospectus because of its importance in the investor’s decisions. Disclosing earnings forecasts can reduce information asymmetry and encourage potential investors to buy offered shares. The accuracy of earnings forecasts, and especially its deter-minants, was explored by some researchers, but for Polish companies such studies have not been conducted.Purpose of the article: The first objective of this study is to examine the bias and accuracy of earnings forecasts disclosed in IPO prospectuses by Polish companies attempting to be listed on the main market of the Warsaw Stock Exchange. The second aim of this paper is to identify the relationship between the absolute fore-cast error employed as a measure of earnings accuracy and a number of company specific characteristics such as company’s size, leverage, forecast horizon, managerial ownership, number of shares offered to investors (in relation to total shares before IPO).Methods: The empirical analysis were conducted on a sample of 102 domestic companies that performed IPOs on the main market of the Warsaw Stock Exchange during 2006-2015 and disclosed earnings forecasts in IPO prospectus. The forecast error (FER) and absolute forecast error (AFER) were adopted as a measure of accuracy of earnings forecasts. The non-parametric test was employed to achieve the adopted aims.Findings & Value added: The results show that, on average, the forecasted earnings exceed the actual earnings (i.e. the earnings forecasts are optimistic) and fore-casts are inaccurate. Moreover, the optimistic forecasts are more inaccurate than pessimistic ones. The findings of multiple regression model show that three independent variables may affect the level of absolute forecast error: the company’s size, managerial ownership and forecast horizon.
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Zhang, Jin, and Haeyoung Shin. "Are Analysts Overoptimistic about the Prospects of Sin Firms?" International Journal of Financial Research 8, no. 4 (September 11, 2017): 99. http://dx.doi.org/10.5430/ijfr.v8n4p99.
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We investigate the association between the bias and accuracy of consensus analysts’ earnings forecasts and whether a firm is a sin firm or not. We measure analyst forecast bias as the difference between the consensus earnings forecast and the actual earnings, scaled by the stock price. We measure analyst forecast accuracy as the negative of the absolute value of the difference between the firms’ forecasted and actual earnings, scaled by the stock price. We find a positive association between the level of forecast optimism and sin firm membership. We find a negative association between the level of forecast accuracy and sin firm membership. Overall, these results imply that analysts tend to issue over-optimistic and less accurate earnings forecasts on sin firms.
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Berger, Philip G., Charles G. Ham, and Zachary R. Kaplan. "Do Analysts Say Anything About Earnings Without Revising Their Earnings Forecasts?" Accounting Review 94, no. 2 (June 1, 2018): 29–52. http://dx.doi.org/10.2308/accr-52164.
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ABSTRACT Analysts are selective about which forecasts they update and, thus, convey information about current quarter earnings even when not revising the current quarter earnings (CQE) forecast. We find that (1) textual statements, (2) share price target revisions, and (3) future quarter earnings forecast revisions all predict error in the CQE forecast. We document several reasons analysts sometimes omit information from the CQE forecast: to facilitate beatable forecasts by suppressing positive news from the CQE forecast, to herd toward the consensus, and to avoid small forecast revisions. We also show that omitting information from CQE forecasts leads to lower forecast dispersion and predictable returns at the earnings announcement.
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Eames, Michael, and Steven Glover. "Earnings Predictability And Broker-Analysts’ Earnings Forecast Bias." Journal of Applied Business Research (JABR) 33, no. 6 (November 1, 2017): 1285–302. http://dx.doi.org/10.19030/jabr.v33i6.10061.
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Scholars have reasoned that analysts issue optimistic forecasts to improve their access to managers’ private information when earnings are unpredictable. While this requires a managerial preference for analyst forecast optimism, the observed walk-down of analyst expectations to beatable forecasts is consistent with a managerial preference for pessimism in short-horizon forecasts. Using data from various sample periods, alternative model specifications, and various measures of earnings unpredictability, we find that pessimism, not optimism, in short-horizon forecasts is associated with increasingly unpredictable earnings. Our results suggest that firms can more effectively manage analysts’ earnings expectations downward when earnings are relatively unpredictable.
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Chi, Yu-Ho, and David A. Ziebart. "Benefits of management disclosure precision on analysts’ forecasts." Review of Accounting and Finance 13, no. 4 (November 4, 2014): 371–99. http://dx.doi.org/10.1108/raf-06-2012-0061.
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Purpose – The purpose of this paper is to examine the impact of management’s choice of forecast precision on the subsequent dispersion and accuracy of analysts’ earnings forecasts. Design/methodology/approach – Using a sample of 3,584 yearly management earnings per share (EPS) forecasts and 10,287 quarterly management EPS forecasts made during the period of 2002-2007 and collected from the First Call database, the authors controlled for factors previously found to impact analysts’ forecast accuracy and dispersion and investigate the link between management forecast precision and attributes of the analysts’ forecasts. Findings – Results provide empirical evidence that managements’ disclosure precision has a statistically significant impact on both the dispersion and the accuracy of subsequent analysts’ forecasts. It was found that the dispersion in analysts’ forecasts is negatively related to the management forecast precision. In other words, a precise management forecast is associated with a smaller dispersion in the subsequent analysts’ forecasts. Evidence consistent with accuracy in subsequent analysts’ forecasts being positively associated with the precision in the management forecast was also found. When the present analysis focuses on range forecasts provided by management, it was found that lower precision (a larger range) is associated with a larger dispersion among analysts and larger forecast errors. Practical implications – Evidence suggests a consistency in inferences across both annual and quarterly earnings forecasts by management. Accordingly, recent calls to eliminate earnings guidance through short-term quarterly management forecasts may have failed to consider the linkage between the attributes (precision) of those forecasts and the dispersion and accuracy in subsequent analysts’ forecasts. Originality/value – This study contributes to the literature on both management earnings forecasts and analysts’ earnings forecasts. The results assist in policy deliberations related to calls to eliminate short-term management earnings guidance.
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Brown, Lawrence D., and Kelly Huang. "Recommendation-Forecast Consistency and Earnings Forecast Quality." Accounting Horizons 27, no. 3 (April 1, 2013): 451–67. http://dx.doi.org/10.2308/acch-50482.
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SYNOPSIS: We investigate the implications of recommendation-forecast consistency for the informativeness of stock recommendations and earnings forecasts and the quality of analysts' earnings forecasts. Stock recommendations and earnings forecasts are often issued simultaneously and evaluated jointly by investors. However, the two signals are often inconsistent with each other. Defining a recommendation-forecast pair as consistent if both of them are above or below their existing consensus, we find that 58.3 percent of recommendation-forecast pairs are consistent in our sample. We document that consistent pairs result in much stronger market reactions than inconsistent pairs. We show that analysts making consistent recommendation forecasts make more accurate and timelier forecasts than do analysts making inconsistent recommendation forecasts, suggesting that consistent analysts make higher-quality earnings forecasts. We extend the literature on informativeness of analyst research by showing that recommendation-forecast consistency is an important ex ante signal regarding both firm valuation and earnings forecast quality. Investors and researchers can use consistency as a salient, ex ante signal to identify more informative analyst research and superior earnings forecasts. Data Availability: All data are available from public sources.
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Ciftci, Mustafa, and Feras M. Salama. "Stickiness in Costs and Voluntary Disclosures: Evidence from Management Earnings Forecasts." Journal of Management Accounting Research 30, no. 3 (November 1, 2017): 211–34. http://dx.doi.org/10.2308/jmar-51966.
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ABSTRACT We investigate the relationship between cost stickiness and management earnings forecasts. Prior research suggests that earnings are more volatile for sticky cost firms resulting in greater earnings forecast errors. The greater forecast errors might increase investors' demand for information and induce managers to issue earnings forecasts. Alternatively, managers might refrain from issuing earnings forecasts for sticky cost firms because greater forecast errors might damage managers' credibility and adversely affect their job security. We find that cost stickiness is positively associated with management earnings forecast issuance, suggesting that the benefits outweigh the costs. Prior research also suggests that cost stickiness has negative implications for earnings. We find a positive association between cost stickiness and management earnings forecast errors, suggesting that managers do not fully incorporate the negative implications of cost stickiness into their forecasts. Finally, we find that analysts' forecast errors for sticky cost firms are greater than managers'. JEL Classifications: M41; M46; G12.
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Lobo, Gerald J., Minsup Song, and Mary Harris Stanford. "The Effect of Analyst Forecasts during Earnings Announcements on Investor Responses to Reported Earnings." Accounting Review 92, no. 3 (August 1, 2016): 239–63. http://dx.doi.org/10.2308/accr-51556.
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ABSTRACT Despite the increased frequency of analyst forecasts during earnings announcements, empirical evidence on the interaction between the information in the earnings announcement and these forecasts is limited. We examine the implications of reinforcing and contradicting analyst forecast revisions issued during earnings announcements (days 0 and +1) on the market response to unexpected earnings. We classify forecast revisions as reinforcing (contradicting) when the sign of analyst forecast revisions agrees (disagrees) with the sign of unexpected earnings. We document larger (smaller) earnings response coefficients for announcements accompanied by reinforcing (contradicting) analyst forecast revisions. Analyses of management forecasts suggest that analyst revisions and management forecasts convey complementary information. Cross-sectional tests show that investors react more to earnings announcements accompanied by analyst forecast revisions when there is greater consensus among analysts (lower dispersion) and that better earnings quality (higher persistence) mitigates the negative impact of contradictory analyst forecast revisions. JEL Classifications: D82; G29; M41.
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Yeo, Gillian Hian Heng, and David A. Ziebart. "An Empirical Test of the Signaling Effect of Management's Earnings Forecasts: A Decomposition of the Earnings Surprise and Forecast Surprise Effects." Journal of Accounting, Auditing & Finance 10, no. 4 (October 1995): 787–802. http://dx.doi.org/10.1177/0148558x9501000406.
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When corporate management issues an earnings forecast there are potentially two surprises. One potential surprise is that a forecast was issued and the other is the surprise in the earnings forecast. Accordingly, the observed stock market reaction to management earnings forecasts may be due to one or the other, or both. This study decomposes the cross-sectional variability in stock market reactions to management earnings forecasts into the portions attributable to the forecast surprise and the earnings surprise. The results indicate that the market's reaction is a function of both the earnings surprise and the forecast surprise. However, the market reaction is more associated with forecast surprise than with the earnings surprise. This suggests that results in previous studies on the market reactions to management earnings forecasts may need to be reconsidered.
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Petruska, Karin A. "The Informativeness Of Cash Flow Forecasts And The Regulation FD Environment." Journal of Business & Economics Research (JBER) 9, no. 6 (May 24, 2011): 29. http://dx.doi.org/10.19030/jber.v9i6.4377.
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Prior literature shows that analysts forecast estimates serve as a proxy for the markets and investors beliefs which are unobservable. For decades, analysts have generated forecasts for use in valuation models including future estimates of earnings and growth. Yet, only recently, analysts have begun to voluntarily provide cash flow per share forecasts at the same time they are producing earnings per share forecasts for firms they follow. This study addresses whether the tendency of analysts to issue cash flow per share forecasts, as a result of changes in the regulatory environment, affects forecast properties. By examining the time frame surrounding Regulation FD, the analysis provides evidence that both the mere existence and the relative measure of analysts cash flow per share forecasts differ in explaining analysts earnings forecast accuracy. Specifically, the empirical results demonstrate that the relative value of analysts cash flow forecasts, the implied value of unexpected accruals, and cash flow forecast errors facilitate the reduction in analysts earnings forecast errors subsequent to the passage of Regulation FD. Further, the inverse relation between these analysts inputs and earnings forecast errors appear to be driven by firms with more accurate cash flow forecasts.
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Barron, Orie E., Donal Byard, and Yong Yu. "Earnings Surprises that Motivate Analysts to Reduce Average Forecast Error." Accounting Review 83, no. 2 (March 1, 2008): 303–25. http://dx.doi.org/10.2308/accr.2008.83.2.303.
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Large earnings surprises and negative earnings surprises represent more egregious errors in analysts' earnings forecasts. We find evidence consistent with our expectation that egregious forecast errors motivate analysts to work harder to develop or acquire relatively more private information in an effort to avoid future forecasting failures. Specifically, we find that after large or negative earnings surprises there is a greater reduction in the error in individual analysts' forecasts of future earnings, and these individual forecasts are based more heavily on individual analysts' private information. This increased reliance on private information reduces the error in the mean forecast of upcoming earnings (even after controlling for the effect of reduced error in individual forecasts). As reliance on private information increases, more of each individual forecast error is idiosyncratic, and thus averaged out in the computation of the mean forecast.
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Frischmann, Peter, K. C. Lin, and Dilin Wang. "Analyst reaction to non-articulation between the balance sheet and the statement of cash flows." Journal of Applied Accounting Research 21, no. 1 (November 19, 2019): 163–84. http://dx.doi.org/10.1108/jaar-02-2019-0036.
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Purpose The purpose of this paper is to investigate the effect of non-articulation on analyst earnings forecast quality. The authors look for evidence on the relationship between non-articulation and analyst earnings forecast properties: forecast inaccuracy, forecast dispersion and forecast bias. Design/methodology/approach The empirical tests are primarily based analyst earnings and cash flow forecasts covered by Institutional Broker Estimate System and financial statement information obtained from Compustat North America database. Findings The authors hypothesize and find that non-articulation is positively related to analyst forecast dispersion, forecast accuracy and forecast bias for one-year ahead of earnings. The effects of non-articulation on analyst earnings forecast inaccuracy and bias are neutralized when the analyst issues a cash flow forecast and when such forecast provides accurate information regarding the forecasted firm’s operating cash flow. On the other hand, cash flow forecast issuance alone does not mitigate the negative influence of non-articulation. Research limitations/implications The sample selection procedure limits the generalizability of the findings. Practical implications The findings confirm CFA Institute and prior research asserting that non-articulation deteriorates the quality of earnings forecasts by financial statement users (more specifically, the financial analysts). The authors add to the literature by documenting that accurate cash flow forecasts help analysts mitigate the negative influence of non-articulation on earnings forecast quality. Originality/value It remains an empirical question whether non-articulation between the balance sheet and the statement of cash flows has an effect on financial statement users’ ability to assimilate financial information. The paper highlights the detrimental effect of non-articulation by documenting the relationship between the non-articulation and the quality of earnings expectation.
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Hirst, D. Eric, Lisa Koonce, and Shankar Venkataraman. "Management Earnings Forecasts: A Review and Framework." Accounting Horizons 22, no. 3 (September 1, 2008): 315–38. http://dx.doi.org/10.2308/acch.2008.22.3.315.
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SYNOPSIS: In this paper, we provide a framework in which to view management earnings forecasts. Specifically, we categorize earnings forecasts as having three components—antecedents, characteristics, and consequences—that roughly correspond to the timeline associated with an earnings forecast. By evaluating management earnings forecast research within the context of this framework, we render three conclusions. First, forecast characteristics appear to be the least understood component of earnings forecasts—both in terms of theory and empirical research—even though it is the component over which managers have the most control. Second, much of the prior research focuses on how one forecast antecedent or characteristic influences forecast consequences and does not study potential interactions among the three components. Third, much of the prior research ignores the iterative nature of management earnings forecasts—that is, forecast consequences of the current period influence antecedents and chosen characteristics in subsequent periods. Implications for researchers, educators, managers, investors, and regulators are provided.
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Baginski, Stephen P., John M. Hassell, and Michael D. Kimbrough. "The Effect of Legal Environment on Voluntary Disclosure: Evidence from Management Earnings Forecasts Issued in U.S. and Canadian Markets." Accounting Review 77, no. 1 (January 1, 2002): 25–50. http://dx.doi.org/10.2308/accr.2002.77.1.25.
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Citing fear of legal liability as a partial explanation, prior research documents (1) managers' reluctance to voluntarily disclose management earnings forecasts, and (2) greater forecast disclosure frequencies in periods of bad news. We provide evidence on how management earnings forecast disclosure differs between the United States (U.S.) and Canada, two otherwise similar business environments with different legal regimes. Canadian securities laws and judicial interpretations create a far less litigious environment than exists in the U.S. We find a greater frequency of management earnings forecast disclosure in Canada relative to the U.S. Further, although U.S. managers are relatively more likely to issue forecasts during interim periods in which earnings decrease, Canadian managers do not exhibit that tendency. Instead, Canadian managers issue more forecasts when earnings are increasing, and their forecasts are of annual rather than interim earnings. Also consistent with a less litigious environment, Canadian managers issue more precise and longer-term forecasts. These findings hold after controlling for other determinants of management earnings forecast disclosure that might differ between the two countries—firm size, earnings volatility, information asymmetry, growth, capitalization rates, and membership in high-technology and regulated industries.
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Clor-Proell, Shana M., D. Eric Hirst, Lisa Koonce, and Nicholas Seybert. "How Disaggregated Forecasts Influence Investor Response to Subsequent Earnings Announcements." Journal of Financial Reporting 4, no. 1 (March 2019): 157–71. http://dx.doi.org/10.2308/jfir-52362.
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Firms often issue disaggregated earnings forecasts, and prior research reveals benefits to doing so. However, we hypothesize and experimentally find that the benefits of disaggregated forecasts do not necessarily carry over to the time of actual earnings announcements. Rather, disaggregated forecasts create multiple points of possible comparison between the forecast and the subsequent earnings announcement. Thus, when firms disaggregate forecasts and subsequently release disaggregated actual earnings numbers, investors reward firms that beat those multiple benchmarks, but punish firms that miss those multiple benchmarks. Thus, we show that issuing a disaggregated earnings forecast to achieve the associated benefits can backfire after the announcement of actual earnings. Our results have implications for researchers and firm managers. Data Availability: Contact the authors.
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Luo, Bing. "Short-term management earnings forecasts and earnings management through real activities manipulation." Asian Review of Accounting 28, no. 1 (November 20, 2019): 110–38. http://dx.doi.org/10.1108/ara-09-2018-0168.
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Purpose The purpose of this paper is to investigate the association between managers’ short-term, quarterly earnings forecast characteristics and earnings management through real activities manipulation. Design/methodology/approach Using a propensity-score matched sample from 2000 to 2015, the author examines whether, compared to non-issuers, firms issuing short-term earnings forecasts exhibit abnormal levels of earnings management through the manipulation of real activities such as acceleration of sales, changes in shipment schedules and delaying R&D and maintenance expenditures. Findings The finding of this study suggests that firms actually engage in less real activities manipulation when they provide short-term management earnings forecasts. This result does not support the practitioners’ criticism that providing short-term management earnings forecasts increases earnings management. Instead, it suggests that providing management earnings forecasts can reduce information asymmetry between managers and external shareholders, thereby constraining managers’ opportunistic behaviors. Originality/value Practitioners have expressed concerns that issuing earnings forecasts may foster managerial myopia, therefore, increasing earnings management. However, recent empirical study found evidence that management earnings forecast mitigates accrual-based earnings management, which is inconsistent with practitioners’ view. This study hence aims to provide timely evidence to this debate by examining the relation between management earnings forecasts and real activities manipulation.
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Pan, Shanshan, and Zhaohui Randall Xu. "The association of analysts’ cash flow forecasts with stock recommendation profitability." International Journal of Accounting & Information Management 28, no. 2 (March 5, 2020): 343–61. http://dx.doi.org/10.1108/ijaim-05-2019-0055.
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Purpose The purpose of this paper is to examine whether analysts’ cash flow forecasts improve the profitability of their stock recommendations and whether the positive effect of cash flow forecasts on analysts’ stock recommendation performance varies with firms’ earnings quality. Design/methodology/approach To test the authors’ predictions, they identify a sample of 161,673 stock recommendations with contemporaneous earnings forecasts and/or cash flow forecasts and regress market-adjusted stock returns on a binary variable that proxies for the issuance of cash flow forecasts while controlling for contemporaneous earnings forecast accuracy, earnings quality, analysts’ forecast experience and capability and certain firm characteristics. The authors’ test results are robust to alternative measures of recommendation profitability, earnings quality and the use of recommendation revisions instead of recommendation levels. Findings The authors find that when analysts issue cash flow forecasts concurrently with earnings forecasts, their stock recommendations lead to higher profitability than when they only issue earnings forecasts, after controlling for analysts’ forecast capability. Moreover, the authors document that the contemporaneous positive relationship between cash flow forecasts and recommendations profitability is stronger for firms with low earnings quality than for firms with high earnings quality. The findings suggest that cash flow forecasts issued by analysts in response to market demand likely play a more important role in firm valuation than cash flow forecasts issued by analysts mainly because of supply-side considerations. Research limitations/implications Future research could build on these findings to conduct further investigation on the alternative incentives for analysts’ forecasts of sales growth and long-term growth rates. Practical implications These findings may also help investors to better assess the quality of analysts’ research outputs and to identify superior stock recommendations. Originality/value This study provides insight into the role of cash flow forecasts in firm valuation and adds fresh evidence to the debate on the usefulness of cash flow forecasts. It extends the stream of research on the characteristics of analyst forecasts and increases our knowledge about the role of analysts in the financial market.
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Givoly, Dan, Carla Hayn, and Reuven Lehavy. "The Quality of Analysts' Cash Flow Forecasts." Accounting Review 84, no. 6 (November 1, 2009): 1877–911. http://dx.doi.org/10.2308/accr.2009.84.6.1877.
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ABSTRACT: This study examines properties of analysts' cash flow forecasts and compares them to those exhibited by analysts' earnings forecasts. Our results indicate that analysts' cash flow forecasts are less accurate than analysts' earnings forecasts and improve at a slower rate during the forecast period. Further, cash flow forecasts appear to be a nai¨ve extension of analysts' earnings forecasts, thus providing limited information on expected changes in working capital. We also find that analysts' forecasts of cash flows are of limited information content and are only weakly associated with stock returns. Finally, estimating expected accruals as the difference between analysts' earnings forecasts and their cash flow forecasts does not result in a better detection of earnings management than achieved by commonly used accrual models.
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Salamouris, Ioannis S., and Yaz Gulnur Muradoglu. "Estimating analyst's forecast accuracy using behavioural measures (Herding) in the United Kingdom." Managerial Finance 36, no. 3 (February 23, 2010): 234–56. http://dx.doi.org/10.1108/03074351011019564.
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PurposeThe purpose of this paper is to identify herding behaviour on financial markets and measure the herding behaviour impact on the accuracy of analysts' earnings forecasts.Design/methodology/approachTwo alternative measures of herding behaviour, on analysts' earnings forecasts are proposed. The first measure identifies herding as the tendency of analysts to forecast near the consensus. The second measure identifies herding as the tendency of analysts to follow the most accurate forecaster. This paper employs the method of The Generalised Method of Moments in order to relax any possible biases.FindingsIn both measures employed, a positive and significant relation is found between the accuracy of analysts' earnings forecasts and herding behaviour. According to the first measure analysts exhibit herding behaviour by forecasting close to the consensus estimates. According the second herding measure, it is found that analysts tend to herd towards the best forecaster at the time. Finally, it is concluded that the accuracy of analysts' forecasts increases as herding increases.Research limitations/implicationsThe present study triggers concerns for further research in the modelling of analysts' forecasting behaviour.Originality/valueThis paper proposes that a measure based on human biases is the best way to estimate and predict the analysts' earnings forecast future accuracy.
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Ahmed, Kamran, Muhammad Nurul Houqe, John Hillier, and Steven Crockett. "Properties of analysts’ consensus cash flow forecasts for Australian firms." Accounting Research Journal 33, no. 1 (January 2, 2020): 128–47. http://dx.doi.org/10.1108/arj-11-2017-0197.
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Purpose The purpose of this paper is to determine the properties of analysts’ cash flows from operations (CFO) forecast generated for Australian listed firms as a productive activity, within the wider processes of financial disclosure in Australia. Design/methodology/approach Two categories of criteria are adopted: first, basic predictive statistical performance relative to a benchmark model and earnings forecasts; and second, relevance for equity pricing, as indicated by the market reaction to cash flow or forecast error reactions. The final sample comprised 2,138 observations between 2001 and 2016 and several regression models are estimated to determine the relative performance and market reaction. Findings Analysts’ consensus cash flow forecasts demonstrate poor predictive performance relative to earnings forecasts. Cash flow forecasts are typically naïve extensions of earnings forecasts. Furthermore, cash flow forecasts appear to be of minimal use for equity market participants in complementing earnings forecasts’ role in informing firms’ equity pricing. Practical implications While analysts’ earnings forecasts are useful for making predictions, the role of analysts’ cash flow forecasts in capital market functional efficiency appears quite limited. Originality/value This study is one of few that examines comparative usefulness of analysts’ earnings and cash flow forecasts and their predictive power using the Australian setting. Additionally, it enriches the sparse international literature on such forecasts.
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Herrmann, Don, and Wayne B. Thomas. "Rounding of Analyst Forecasts." Accounting Review 80, no. 3 (July 1, 2005): 805–23. http://dx.doi.org/10.2308/accr.2005.80.3.805.
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We find that analyst forecasts of earnings per share occur in nickel intervals at a much greater frequency than do actual earnings per share. Analysts who round their earnings per share forecasts to nickel intervals exhibit characteristics of analysts who are less informed, exert less effort, and have fewer resources. Rounded forecasts are less accurate and the negative relation between rounding and forecast accuracy increases as the rounding interval increases from nickel to dime, quarter, half-dollar, and dollar. An examination of announcement period returns reveals that market expectations more closely align with consensus forecasts including rounded forecasts and then correct toward the more accurate consensus forecasts excluding rounded forecasts. Finally, exclusion of rounded forecasts decreases forecast dispersion.
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Lopez, Thomas J., and Lynn Rees. "The Effect of Beating and Missing Analysts' Forecasts on the Information Content of Unexpected Earnings." Journal of Accounting, Auditing & Finance 17, no. 2 (April 2002): 155–84. http://dx.doi.org/10.1177/0148558x0201700204.
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This study investigates whether the market rewards (penalizes) firms for meeting (not meeting) analysts' earnings forecasts. Specifically, we examine the market response to positive and negative forecast errors. In addition, we examine whether the sensitivity of stock prices to positive or negative forecast errors is affected by the firms' history of consistently beating or missing analysts' forecasts. The results indicate that the earnings multiple applied to positive unexpected earnings is significantly greater than for negative unexpected earnings. In addition, we find that after controlling for the magnitude of the forecast error and bad news preannouncements, the market penalty for missing forecasts is significantly greater in absolute terms than the response to beating forecasts. We document evidence that, while the market recognizes and partially discounts the systematic component of positive analysts' forecast errors, a higher multiple is attached to the unsystematic component of unexpected earnings of firms that consistently beat analysts' forecasts. Overall, the evidence suggests that the increasing frequency of positive forecast errors as documented in previous research is a rational response by managers to market-related incentives.
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Umezawa, Toshihiro, and Ujo Goto. "Corporate ownership structure and management earnings forecast." Corporate Ownership and Control 4, no. 3 (2007): 247–50. http://dx.doi.org/10.22495/cocv4i3c2p2.
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The purpose of this paper is to examine how the structure of corporate ownership impacts the accuracy of management earning forecasts in Japan. An evaluation of the financial reporting reform from 2000 is also presented. As a result, corporate ownership structure variables, such as managerial ownership, financial institution ownership, foreign investment ownership and corporation ownership, are negatively associated with the accuracy of management earnings forecast. We find that corporate ownership structure makes the manager announce more accurate management earnings forecasts. In addition, the reform of financial reporting system in 2000 has an influence on the quality of financial disclosures
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Park, Hyung Ju, and Joong-Seok Cho. "Earnings Transparency and Financial Analysts’ Target Price Forecasts." International Journal of Financial Research 11, no. 4 (June 28, 2020): 1. http://dx.doi.org/10.5430/ijfr.v11n4p1.
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This paper examines the effect of earnings transparency on analysts’ target price forecast properties. The issuance of target price forecasts by financial analysts is a very recent event and target price forecasts are regarded as the most summarized and explicit estimate of the postulated future value of the firm.The sample consists of financial analysts’ forecasts of annual target price issued for firms listed on U.S. stock exchanges from 2001 to 2017. We measure each firm’s earnings transparency as the contemporaneous co-movement between firm’s earnings and change in earnings and stock returns, consisting in industry-specific and -neutral components in earnings-returns relation.Our results show that target price forecasts for more transparent earnings are less biased and more tend to attain the actual stock prices. These results demonstrate that earnings transparency is positively related with analysts’ target price forecasts. Our empirical results corroborate that more transparent accounting information help the market participants in forming more accurate and attainable forecasts. Our study extends the body of research studying the relation between analysts’ forecast properties and the usefulness of accounting information by investigation target price forecasts.
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Eames, Michael J., and Steven M. Glover. "Earnings Predictability and the Direction of Analysts' Earnings Forecast Errors." Accounting Review 78, no. 3 (July 1, 2003): 707–24. http://dx.doi.org/10.2308/accr.2003.78.3.707.
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Das et al. (1998) suggest that as earnings become less predictable, analysts issue increasingly optimistic forecasts to please managers and consequently gain, or at least limit the loss of, access to managers' private information. We reexamine the association between earnings forecast error and earnings predictability because there is evidence suggesting that deliberate earnings forecast optimism is not an effective mechanism for gaining access to managers' information (e.g., Eames et al. 2002; Matsumoto 2002). We document associations between earnings level and both forecast error and earnings predictability. These associations suggest that earnings level may be an important control variable when examining the association between forecast error and earnings predictability. When we control for the level of earnings we find no significant association between forecast error and earnings predictability. Thus, we find no evidence that analysts intentionally issue optimistically biased earnings forecasts.
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Miller, Jeffrey S., and Lisa M. Sedor. "Do Stock Prices Influence Analysts' Earnings Forecasts?" Behavioral Research in Accounting 26, no. 1 (September 1, 2013): 85–108. http://dx.doi.org/10.2308/bria-50626.
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ABSTRACT This study uses an experiment with professional financial analysts to examine whether stock prices influence analysts' earnings forecasts. The findings indicate that analysts' revised forecasts made in response to a management earnings forecast differ depending on the level of uncertainty communicated by management's guidance and the stock price reaction to it. Lower (higher) stock price leads to lower (higher) analysts' forecasts when uncertainty about future earnings is high, but not when uncertainty about future earnings is low. Overall, the evidence suggests that the documented association between prior security returns and analysts' earnings forecasts is due, at least in part, to the influence of stock price on analysts' earnings forecasts. Data Availability: Contact the authors.
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Doran, David T., and Robert Nachtmann. "The Association of Stock Distribution Announcements and Earnings Performance." Journal of Accounting, Auditing & Finance 3, no. 2 (April 1988): 113–32. http://dx.doi.org/10.1177/0148558x8800300203.
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This paper analyzes the association of unexpected earnings with stock dividend and stock split announcements. Unexpected earnings are modeled as the percentage deviation of actual earnings from expected. Value Line's earnings forecasts are used as a surrogate for the market's timely expectation of future earnings. The primary findings are: (1) postdistribution earnings realizations are greater than expected; and (2) deviations of realized earnings from expected are (a) directly related to the size of the stock distribution and (b) inversely related to the level of market anticipation of the event. Further, distribution size may be a proxy for market anticipation in that small distributions (stock dividends) are dominated by anticipated events and large distributions (stock splits) by unanticipated events. These findings are robust across samples that control for large measurement error due to small levels of forecasted earnings, and event contamination due to the simultaneous announcement of firm-related events. Examination of analysts' forecasts immediately following the event indicates a significant upward revision in earnings expectations. This finding, coupled with an analysis of a control sample of Value Line earnings forecasts, indicates that the observed unexpected earnings are not the result of systematic Value Line forecast error. Therefore, the paper provides support for the notion that stock distribution announcements convey future earnings information.
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Guttman, Ilan. "The Timing of Analysts' Earnings Forecasts." Accounting Review 85, no. 2 (March 1, 2010): 513–45. http://dx.doi.org/10.2308/accr.2010.85.2.513.
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ABSTRACT: Existing literature assumes that the order and timing of analysts' earnings forecasts are determined exogenously. However, analysts choose when to issue their forecasts. This study develops a model that endogenizes the timing decision of analysts and analyzes their equilibrium timing strategies. In the model, analysts face a trade-off between the timeliness and the precision of their forecasts. The model introduces a timing game with two analysts, derives and analyzes its unique pure strategies equilibrium, and provides new empirical predictions about the precision and timing of analysts' forecasts. The equilibrium has one of two patterns: either the times of the analysts' forecasts cluster, or there is a separation in the times of the forecasts. The less informed and less similar the analysts are, the more likely it is that they forecast at different points in time. All else equal, analysts with a higher precision of initial private information tend to forecast earlier, and analysts with a higher learning ability tend to forecast later.
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Wang, Tina. "Does the Equity Market Reward “Superior” Management Earnings Forecast? Evidence from the U.S. Quarterly Earnings Guidance." Asia-Pacific Management Accounting Journal 16, no. 3 (December 1, 2021): 1–30. http://dx.doi.org/10.24191/apmaj.v16i3-01.
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This paper examines whether equity markets reward the controversial practice of issuing short-term management earnings forecasts. Using a large sample of quarterly earnings forecasts, this research found that firms may temporarily reduce stock price volatility by issuing quarterly earnings forecasts. Furthermore, the analysis showed that not all guidance issuers are equally rewarded by equity capital markets. The benefits of reduced stock price volatility and favorable market valuation primarily accrue to firms with a track record of supplying accurate and timely short-term earnings forecasts. Findings suggest that superior short-term earnings guidance, which fosters transparent financial information environments and reduces investor information uncertainty, is indeed rewarded by equity capital markets. As limited research examines the association between forecast attributes and the capital market consequences of quarterly earnings guidance, this study aimed to provide empirical evidence on equity capital market rewards by issuing high-quality quarterly earnings guidance. A practical implication is that firms need to invest in accounting information systems and accounting talent in order to achieve capital market benefits of supplying high-quality short-term earnings forecasts. Keywords: quarterly earnings guidance, forecast attributes, accounting information system, equity market rewards, United States
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Zhang, Li. "The Effect of Ex Ante Management Forecast Accuracy on the Post-Earnings-Announcement Drift." Accounting Review 87, no. 5 (April 1, 2012): 1791–818. http://dx.doi.org/10.2308/accr-50197.
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ABSTRACT I examine the effect of ex ante management forecast accuracy on the post-earnings-announcement drift when management forecasts about next quarter's earnings are bundled with current quarter's earnings announcements. I build a composite measure of ex ante management forecast accuracy that takes into account forecast ability, forecast difficulty, and forecast environment. The results show that the bundled forecasts with higher ex ante accuracy mitigate investors' under-reaction to current earnings and reduce the magnitude of the post-earnings-announcement drift. Data Availability: The data used in this paper are available from the sources listed in the text.
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Kirk, Marcus P., David A. Reppenhagen, and Jennifer Wu Tucker. "Meeting Individual Analyst Expectations." Accounting Review 89, no. 6 (June 1, 2014): 2203–31. http://dx.doi.org/10.2308/accr-50828.
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ABSTRACT The expectations management literature has so far focused on firms meeting the analyst consensus forecast—the expectations of analysts as a group—at earnings announcements. In this study we argue that investors may use individual analyst forecasts as additional benchmarks in evaluating reported earnings because the consensus forecast underutilizes private information contained in individual analyst forecasts. We predict that measures reflecting such private information have incremental explanatory power over the consensus forecast for the market's reaction to earnings news. We find results consistent with this prediction by examining two measures: (1) the percentage of individual forecasts met and (2) meeting the key analyst forecast. We extend the literature by documenting the role of individual analyst forecasts in investors' evaluations of reported earnings. JEL Classifications: G10; G11; G17; G14; G24. Data Availability: Data are publicly available from the sources identified in the paper.
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Harris, Richard D. F., and Pengguo Wang. "Model-based earnings forecasts vs. financial analysts' earnings forecasts." British Accounting Review 51, no. 4 (June 2019): 424–37. http://dx.doi.org/10.1016/j.bar.2018.10.002.
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Ho, Li-Chin Jennifer, and Jeffrey Tsay. "Analysts' Forecasts of Taiwanese Firms' Earnings: Some Empirical Evidence." Review of Pacific Basin Financial Markets and Policies 07, no. 04 (December 2004): 571–97. http://dx.doi.org/10.1142/s0219091504000238.
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This study examines the accuracy and bias associated with the analysts' earnings forecasts of Taiwanese firms. Using the forecast data of individual analysts over 1991–1997 from the I/B/E/S database, we find that analysts' forecasts of earnings are generally more accurate than the predictions of a naïve forecasting model. However, this superiority seems to be largely confined to shorter forecast horizons. We also find that the analysts' earnings forecasts of Taiwanese firms are optimistically biased and that the bias depends on the nature of the earnings news. In addition, analysts' forecasts appear to be more accurate for larger firms and the bias also decreases with firm size. We find some variation in forecast accuracy and bias across industries but the overall results are not driven by any specific time period.
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Wahab, Susan, Karen Teitel, and Bernard Morzuch. "How Analysts and Whisperers Use Fundamental Accounting Signals to Make Quarterly EPS Forecasts." Journal of Accounting, Auditing & Finance 32, no. 3 (November 15, 2015): 401–22. http://dx.doi.org/10.1177/0148558x15613040.
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We examine the relative efficiency of whisperers’ and analysts’ forecasts of one-quarter-ahead earnings per share (EPS) and identify commonalities and differences in their use of fundamentals to forecast earnings. Results suggest that (a) fundamentals that focus on sales and cost of sales are relevant in explaining one-quarter-ahead EPS changes; (b) whisperers focus on cash flow fundamentals and accrual-based earnings measures in their one-quarter-ahead forecasts, whereas analysts focus on only cash flow fundamentals; and (c) although neither analysts nor whisperers fully incorporate information contained in fundamentals and accrual-based earnings measures in their forecasts, whisperers’ earnings forecast model (forecast errors model) exhibits higher (lower) explanatory power than that of analysts. We also examine robustness of our results by reestimating the models using a two-way random-effects panel data estimator. Although our conclusions remain the same, more statistically significant fundamentals emerge in panel regression results. Evidence presented in this article is consistent with (a) whisperers being different from analysts and (b) whisper forecasts containing unique incremental information beyond that of analysts’ forecasts. Market participants may want to consider using both forecasts when making investment decisions.
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Irvine, Paul J. "Analysts' Forecasts and Brokerage-Firm Trading." Accounting Review 79, no. 1 (January 1, 2004): 125–49. http://dx.doi.org/10.2308/accr.2004.79.1.125.
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Using unique data on brokerage-firm trading, I examine whether analysts' earnings forecasts and stock recommendations affect their brokerage firms' share of trading in the forecast stocks. I find that individual analyst's forecasts that differ from the consensus forecast generate significant brokerage-firm trading in the forecast stocks in the two weeks after the forecast release date, affirming that analysts' forecasts affect their brokers' commission revenue. However, I find no evidence that analysts' forecast errors—the difference between forecast earnings and actual earnings—increase brokerage-firm trading. This result suggests that analysts cannot generate trade for their employers simply by adding error to their forecasts. I find that buy recommendations generate relatively more trading, both buying and selling, through the analyst's brokerage firm. Collectively, these results suggest that analysts can generate higher trading commissions through their positive stock recommendations than by biasing their forecasts.
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He, Ying. "The Effect of Brokerage Firm Size on Analysts’ Earnings Forecast Accuracy: Evidence from the Culture Media Industry." BCP Business & Management 30 (October 24, 2022): 140–47. http://dx.doi.org/10.54691/bcpbm.v30i.2414.
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The factors influencing analysts’ earnings forecast accuracy are a popular research topic today. Some researchers have found that brokerage firm size affects analysts’ earnings forecast accuracy. However, there is a research gap in the effect of brokerage firm size on analysts’ earnings forecast accuracy in a particular industry. As a result, this study investigates the link between brokerage company size and analysts’ earnings prediction accuracy by collecting and comparing analysts’ earnings forecast data from major brokerage companies and analysts’ earnings forecast data from small and medium-sized brokerage firms. It is found that the accuracy of analysts’ earnings forecasts for the culture media industry is positively correlated with the size of brokerage firms. This indicates that analysts at large brokerage firms have a higher accuracy of earnings forecasts for the culture media industry.
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Ong, Chui Zi, Rasidah Mohd-Rashid, Waqas Mehmood, and Ahmad Hakimi Tajuddin. "Does disclosure of earnings forecasts regulation affect the valuation of IPOs? Evidence from an emerging country." Asian Review of Accounting 29, no. 4 (October 6, 2021): 558–78. http://dx.doi.org/10.1108/ara-09-2020-0142.
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PurposeThis paper aimed to explore the effect of a regulatory change pertaining to earnings forecasts disclosure from a mandatory to a voluntary regime on the valuation of Malaysian initial public offerings (IPOs).Design/methodology/approachThe study employed ordinary least square (OLS) regression and quantile regression to analyse the impact of disclosure of earnings forecasts regulation on the valuation of IPOs which comprised 458 IPOs reported for the period 2000–2017 on Bursa Malaysia.FindingsThis paper revealed that the regulatory change in forecasted earnings disclosure from a mandatory to a voluntary regime, effective from 1 February 2008, had a negative impact on the valuation of IPOs. The regime change did not improve the transparency of firms issuing IPOs. In fact, the absence of forecasted earnings information in most IPO prospectuses caused ex ante uncertainties to increase. Voluntary disclosure, however, had a significant positive relationship with the valuation of the IPOs issued during the global financial crisis period (2008–2010). Firms concealed their poor qualities by excluding forecasted earnings information from their prospectuses in order to have a fair valuation.Practical implicationsThe findings may be used by policymakers as guidance in improving the existing regulation regarding the disclosure of forecasted earnings.Originality/valueThis paper provides new insight on the effect of a regulatory change pertaining to earnings forecasts disclosure from a mandatory to a voluntary regime on the valuation of Malaysian IPOs. It also provides evidence that the regulatory change of earnings forecast disclosure affects the IPOs' values listed during the global financial crisis period.
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Chin, Chen-Lung, Tyrone T. Lin, and Chia-Chi Lee. "Convertible Bonds Issuance Terms, Management Forecasts, and Earnings Management: Evidence from Taiwan Market." Review of Pacific Basin Financial Markets and Policies 08, no. 03 (September 2005): 543–71. http://dx.doi.org/10.1142/s0219091505000506.
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Convertible bond (CB) issuers have been required to include financial forecasts in prospectuses filed with the Taiwan Securities and Futures Commission (TSFC) since 1991. This study examines the association between CB issuance terms and the extent of optimistic initial earnings forecasts and earnings management, as well as the association between CB issuance terms and the extent of reported (post-managed) earnings forecasts. Empirical results indicate that: (1) the likelihood of the issuing company making an optimistic initial earnings forecast (positive initial forecast error) increases with conversion price, issuance amount, and issuance period, but decreases with an increasing conversion period and reselling premium; (2) earnings management was pervasive in the year of issue of the CB; and (3) a substitutive relation exists between earnings management and issuance terms in CB issuing.
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Chen, Yu-Cheng, Chiung-Yao Huang, and Pei-I. Chou. "The Moderating Effect of Industry Concentration on the Relations Between External Attributes and the Properties of Analyst Earnings Forecast." Review of Pacific Basin Financial Markets and Policies 16, no. 03 (September 2013): 1350019. http://dx.doi.org/10.1142/s0219091513500197.
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Based on the work of earlier studies, the main objective of this study is to determine whether the properties of analyst earnings forecast are related to the interaction effects of external attributes and industry concentration that were not the focus of previous research. Specifically, this study examines the relations between external attributions and the properties of analyst earnings forecasts. Furthermore, we explore the moderating effect of industry concentration on the relations between external attributions and the properties of analyst earnings forecasts. Using data from Compustat and I/B/E/S, we provide evidence that analysts' earnings forecast accuracy is lower and the forecast dispersion is larger for firms with more earnings surprise. Firms with more analysts' forecasts covering are associated with higher forecast accuracy, but not necessarily higher forecast dispersion. The moderating effects of industry concentration on the relationships between earnings surprise, the number of estimates covering the company and forecast accuracy are particularly strong. In addition, the moderating effects of industry concentration on the relationship between earnings surprise, the number of estimates covering the company and the forecast dispersion are partially supported. Overall, the industrial concentration factor either magnifies or alleviates the effect of external attributions on analyst's forecast accuracy and forecast dispersion.
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Barron, Orie E., and Pamela S. Stuerke. "Dispersion in Analysts' Earnings Forecasts as a Measure of Uncertainty." Journal of Accounting, Auditing & Finance 13, no. 3 (July 1998): 245–70. http://dx.doi.org/10.1177/0148558x9801300305.
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This study examines whether dispersion in analysts' earnings forecasts reflects uncertainty about firms' future economic performance. Prior research examining this issue has been inconclusive. These studies have concluded that forecast dispersion is likely to reflect factors other than uncertainty about future cash flows, such as uncertainty about the price irrelevant component of firms' financial reports (Daley et al. [1988]; Imhoff and Lobo [1992]). Abarbanell et al. (1995) argue that, if forecast dispersion after (i.e., conditional on) an earnings announcement reflects uncertainty about firms' future cash flows and this uncertainty causes investors to desire additional information, then dispersion will be positively associated with both (a) the level of demand for more information and (b) the magnitude of price reactions around the subsequent earnings release. In this study, we construct a measure of informational demand using the incidence of analyst forecast updating after dispersion is measured. We find a positive association between dispersion in earnings forecasts after an earnings release and this measure of informational demand. We also find a positive association between forecast dispersion and the magnitude of price reactions around subsequent earnings releases. These associations are most apparent when potentially stale (or outdated) forecasts are removed from measures of forecast dispersion. These associations also persist after controlling for other measures of uncertainty (e.g., beta and the variance of daily stock returns), consistent with dispersion in analysts' earnings forecasts serving as a useful indicator of uncertainty about the price relevant component of firms' future earnings.
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Goh, Jaimin, Sooin Kim, and Ju Hyoung Park. "Changes in the Timing of Analysts’ Forecast Revision after the Adoption of IFRS." Korean Accounting Information Association 22, no. 4 (December 31, 2022): 47–73. http://dx.doi.org/10.29189/kaiajfai.22.4.3.
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[Purpose] Management forecasts are recognized as more accurate than analysts forecasts under higher information uncertainty. The switch to IFRS is known as an increase in information uncertainty. We aim to find the impact of IFRS on the analyst’s use of management forecasts in revising their earnings forecasts.
[Methodology] Focusing on the speed to reflect management forecasts into the analysts’ forecast revision, we use OLS regression to investigate the change in time spent in the revision before and after IFRS adoption. Further, we examine the moderating effect of the information amount in management forecast on the days it takes for an analyst to revise the forecast after the IFRS was adopted.
[Findings] We find that analysts revise their earnings forecasts more quickly in the post－IFRS period than in the pre－IFRS period when the management forecast is announced. This analyst’s rapid response to management forecasts in the post－IFRS period weakened as the gap between the management forecast and the analyst’s most recent forecast is large. Further, as the management forecasts were pessimistic or inaccurate, the analysts need more time to incorporate the information in the forecast revision.
[Implications] Our findings imply that the adoption of IFRS increases the informative value of management forecasts and that the news and the reliability of management forecast significantly affect the analyst’s use of management forecasts in revision earnings forecasts. In particular, it can be evaluated as using a more sophisticated methodology than prior studies in that financial analysts analyze the time spent revising their own forecasts.
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Veenman, David, and Patrick Verwijmeren. "Do Investors Fully Unravel Persistent Pessimism in Analysts' Earnings Forecasts?" Accounting Review 93, no. 3 (July 1, 2017): 349–77. http://dx.doi.org/10.2308/accr-51864.
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ABSTRACT This study presents evidence suggesting that investors do not fully unravel predictable pessimism in sell-side analysts' earnings forecasts. We show that measures of prior consensus and individual analyst forecast pessimism are predictive of both the sign of firms' earnings surprises and the stock returns around earnings announcements. That is, we find that firms with a relatively high probability of forecast pessimism experience significantly higher announcement returns than those with a low probability. Importantly, we show that these findings are driven by predictable pessimism in analysts' short-term forecasts, as opposed to optimism in their longer-term forecasts. We further find that this mispricing is related to the difficulty investors have in identifying differences in expected forecast pessimism. Overall, we conclude that market prices do not fully reflect the conditional probability that a firm meets or beats earnings expectations as a result of analysts' pessimistically biased short-term forecasts. JEL Classifications: G12; G14; G20.
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Ham, Charles G., Zachary R. Kaplan, and Zawadi R. Lemayian. "Rationalizing forecast inefficiency." Review of Accounting Studies 27, no. 1 (October 1, 2021): 313–43. http://dx.doi.org/10.1007/s11142-021-09622-8.
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AbstractWe show analysts’ own earnings forecasts predict error in their own forecasts of earnings at other horizons, which we argue provides a measure of the extent to which analysts inefficiently use information. We construct our measure by exploiting two sources of variation in analysts’ incentives: (i) more recent forecasts have greater salience at the time of the earnings release so accuracy incentives are higher (lower) at shorter (longer) forecast horizons and (ii) analysts have greater incentives for optimism (pessimism) at longer (shorter) horizons. Consistent with these incentives affecting the incorporation of information into forecasts, we document (i) current year forecasts underweight (overweight) information in shorter (longer) horizon forecasts and (ii) the mis-weighting is more pronounced when recent news is negative—when analysts have greater (weaker) incentives to incorporate the news into shorter (longer) horizon forecasts. Finally, returns tests suggest that forecasts adjusted for the inefficiency we document better represent market expectations of earnings.
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Zhang, Xiaoxiang, Jo-Ting Wei, and Hsin-Hung Wu. "Family firm and analyst forecasts in an emerging economy." Management Decision 55, no. 9 (October 16, 2017): 2018–37. http://dx.doi.org/10.1108/md-07-2016-0517.
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Purpose The purpose of this paper is to examine how family firms affect analyst forecast dispersion, accuracy and optimism and how earnings smoothness as the moderating factor, affects these relationships in an emerging market context. Design/methodology/approach This paper uses the population sample of firms listed on the Taiwan Stock Exchange from 2009 to 2010 as the research sample, which includes 963 firm-year observations. Findings The findings show that analysts following family firms are more likely to have more dispersed, less accurate and more optimism biased forecasts than those following nonfamily firms. Earning smoothness is mainly used by nonfamily firms as a signaling strategy to improve analyst forecast quality. In contrast, earnings smoothness is mainly used by families as a garbling strategy, stimulating forecast optimism. Only earnings smoothness in family firms with a high level of family ownership concentration is likely to be signaling-oriented to improve analyst forecast accuracy and mitigate analyst optimism biases. Originality/value Emerging markets are not only featured by prevailing principal-principal conflicts but also have multiple levels of agency conflicts among large shareholders, minority shareholders and professionally hired managers. This research reveals the multiple governance roles of family owners in affecting analyst forecast quality, including their entrenchment role in extracting private benefits of control through opaque environments and market discipline distortion role in aligning interests between managers and families without prioritizing meeting or beating analyst forecasts, both at the cost of minority shareholders. This research further disentangles the intertwined signaling oriented and garbiling oriented incentives associated with earnings smoothness under family governance.
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Kato, Kazuo, Douglas J. Skinner, and Michio Kunimura. "Management Forecasts in Japan: An Empirical Study of Forecasts that Are Effectively Mandated." Accounting Review 84, no. 5 (September 1, 2009): 1575–606. http://dx.doi.org/10.2308/accr.2009.84.5.1575.
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ABSTRACT: We study management forecasts in Japan, where forecasts are effectively mandated but managers have considerable latitude over the numbers they release. We find that managers' initial earnings forecasts for a fiscal year are systematically upward-biased but that they revise their forecasts downward during the fiscal year so that most earnings surprises are non-negative. Managers' initial forecast optimism is inversely related to firm performance, and is more pronounced for firms with higher levels of insider ownership, smaller firms, and firms with a history of forecast optimism. The fact that managers' forecasts tend to be consistently optimistic suggests that reputation effects are insufficient to ensure managerial forecast accuracy. We also find that the information content of managers' forecasts is related to proxies for whether market participants view the forecasts as credible.
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Agrawal, Anup, and Mark A. Chen. "Analyst Conflicts and Research Quality." Quarterly Journal of Finance 02, no. 02 (June 2012): 1250010. http://dx.doi.org/10.1142/s2010139212500103.
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This paper examines whether the quality of stock analysts' forecasts is related to conflicts of interest from their employers' investment banking (IB) and brokerage businesses. We consider four aspects of forecast quality: accuracy, bias, and revision frequency of quarterly earnings per share (EPS) forecasts and relative optimism in long-term earnings growth (LTG) forecasts. Using a unique dataset that contains the annual revenue breakdown of analysts' employers among IB, brokerage, and other businesses, we uncover two main findings. First, accuracy and bias in quarterly EPS forecasts appear to be unrelated to conflict magnitudes after controlling for forecast age, firm resources, and analyst characteristics. Second, relative optimism in LTG forecasts and the revision frequency of quarterly EPS forecasts are positively related to the importance of brokerage business to analysts' employers. Additional tests suggest that the frequency of quarterly forecast revisions is positively related to analysts' trade generation incentives. Our findings suggest that reputation concerns keep analysts honest with respect to short-term earnings forecasts but not LTG forecasts. In addition, conflicts from brokerage appear to play a more important role in shaping analysts' forecasting behavior than has been previously recognized.
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Gong, Guojin, Yue Li, and Ling Zhou. "Do management earnings forecasts fully reflect information in past earnings changes?" International Journal of Accounting & Information Management 27, no. 3 (August 5, 2019): 373–406. http://dx.doi.org/10.1108/ijaim-11-2017-0144.
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Purpose It has been widely documented that investors and analysts underreact to information in past earnings changes, a fundamental performance indicator. The purpose of this paper is to examine whether managers’ voluntary disclosure efficiently incorporates information in past earnings changes, whether analysts recognize and fully anticipate the potential inefficiency in management forecasts and whether managers’ potential forecasting inefficiency entirely results from intentional disclosure strategies or at least partly reflects managers’ unintentional information processing biases. Design/methodology/approach Archival data were used to empirically test the relation between management earnings forecast errors and past earnings changes. Findings Results show that managers underreact to past earnings changes when projecting future earnings and analysts recognize, but fail to fully anticipate, the predictable bias associated with past earnings changes in management forecasts. Moreover, analysts appear to underreact more to past earnings changes when management forecasts exhibit greater underestimation of earnings change persistence. Further analyses suggest that the underestimation of earnings change persistence is at least partly attributable to managers’ unintentional information processing bias. Originality/value This study contributes to the voluntary disclosure literature by demonstrating the limitation in the informational value of management forecasts. The findings indicate that the effectiveness of voluntary disclosure in mitigating market mispricing is inherently limited by the inefficiency in management forecasts. This study can help market participants to better use management forecasts to form more accurate earnings expectations. Moreover, our evidence suggests a managerial information processing bias with respect to past earnings changes, which may affect managers' operational, investment or financing decisions.
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Zhang, Weiqi, Huong Ha, and Hui Ting Evelyn Gay. "Analysts’ forecasts between last consensus and earning announcement date." Journal of Financial Reporting and Accounting 18, no. 4 (November 16, 2020): 779–93. http://dx.doi.org/10.1108/jfra-04-2020-0102.
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Purpose Thomson financial database reports a monthly consensus measure of analysts’ forecasts in the third week of every month, and firms’ earnings announcement dates are usually different from the last consensus calculation date. Thus, there is a gap between the last consensus calculation date and the earnings announcement date of firms. This study aims to address the question: “Do analysts issue forecasts that are slightly higher than the consensus number to increase the accuracy of their forecasts?” Design/methodology/approach This study is based on a sample of 91,172 quarterly earnings forecasts of various firms from 1990 to 2007 made between the last consensus calculation date and quarterly earnings announcement date. Descriptive statistics and statistical tests were used to analyze the data. Findings The findings propose that contrary to expectation, analysts’ forecasts between the last consensus calculation date and earnings announcement date are smaller than the consensus number. Also, the forecasts made between the last consensus and earnings announcement date is not as informative as forecasts made at other times as they could merely reflect the analysts’ herding behavior resulting from their career concerns. Originality/value This study provides a link between the literature that studies firms’ meet or beat analysts’ earnings phenomenon and analysts’ forecast decision-making context. This study also provides useful implications for the literature on the information content of analysts’ forecasts.
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Dechow, Patricia M., and Haifeng You. "Analysts' Motives for Rounding EPS Forecasts." Accounting Review 87, no. 6 (June 1, 2012): 1939–66. http://dx.doi.org/10.2308/accr-50226.
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ABSTRACT We investigate analysts' motives for rounding annual EPS forecasts (placing a zero or five in the penny location of the forecast). We first show that an intuitive reason for analysts to engage in rounding is in circumstances where the penny digit of the forecast is of less economic significance. By rounding, analysts reveal that their forecasts are not intended to be precise to the penny. We also show that analyst incentives impact the likelihood of rounding. Specifically, we predict that analysts will exert less effort forecasting earnings for firms that generate less brokerage or investment banking business since such firms create less value for the analysts' employers. As a consequence of this reduced effort and attention, the analyst will be more uncertain about the penny digit of the forecast and so will round. Our results are consistent with this prediction. One implication of our findings is that a rounded forecast is a simple and easily observable proxy for a more noisy measure of the market's expectation of earnings. Consistent with this implication, we show that rounded forecasts bias down earnings response coefficients at earnings announcements.