Fair value accounting of financial assets and analyst forecasts

Abstract

We examine how listed firms’ financial asset holdings affect analyst forecasts. Using China A-share firms over the period 2009–2011, we find that (1) listed firms sell available-for-sale securities (AFS) to meet or beat analyst forecasts, and (2) that when firms hold AFS, their analyst forecasts are more accurate, less biased and less dispersed. However, whether firms hold trading securities (TS) has no significant effect on either analyst forecast accuracy or forecast dispersion. Further examination indicates that listed firms use AFS to manipulate earnings, and that outside governance by the financial market and legal environment cannot moderate this opportunistic behaviour. Finally, our empirical results show that analysts can see through firms’ earnings management in selling AFS. Thus, our results suggest that standard setters should consider managers’ opportunistic behaviour in derecognising financial assets.