How Efficient Is the Market for Australian Firms’ Earnings Information?

Abstract

We construct a measure of the speed with which forecasts issued by sell-side analysts accurately forecast future annual earnings. Following Marshall (2018), we label this measure earnings information flow timeliness (EIFT). This measure avoids the aggregation problem inherent in price-based measures of information efficiency. We document large variation in EIFT across firm-years, and show that EIFT is positively associated with the extent of analyst following, consistent with increased analyst coverage improving the speed with which earnings-related information is recognised. We also find that EIFT is higher for firm-years classified as “bad news” (i.e., where analysts’ forecasts at the start of the financial period exceed the reported outcome). However, when we separately consider instances where analysts appear to forecast non-GAAP (or “street”) earnings rather than GAAP earnings, we find that the greater timeliness of bad news is concentrated among observations where analysts forecast non-GAAP earnings, where unusual items are typically excluded. We conclude that the market for accounting information is more efficient for negative operating outcomes than for negative outcomes reflecting unusual items.