Earnings Forecast Accuracy Research Articles

How analyst recommendations respond to corporate uncertainty caused by investment behavior

PurposeCorporate investment behavior increases the uncertainty of a company’s operation and performance. The purpose of this paper is to investigate how analyst recommendations respond to corporate uncertainty caused by investment behavior and what motivates analysts to react as they do.Design/methodology/approachThe authors test two motivation hypotheses: the hypothesis that analysts are currying favor with management to obtain private information and the hypothesis that analysts have conflicts of interest due to connections. Using Chinese analyst-level data from 2007 to 2015, the authors find that overall investment levels, R&D investment and M&A events are significantly positively correlated with analyst recommendations, suggesting that analysts tend to react optimistically to corporate investment behavior.FindingsAnalysts are only optimistic about companies with low information transparency, suggesting that analysts may be trying to curry favor with management to gain access to private information. The authors find that analysts with stronger recommendations have more private information and analysts with more private information publish more accurate earnings forecasts, which supports the hypothesis that analysts curry favor with management through optimistic recommendations to obtain more private information. This is consistent with the logic that the difficulty of earnings forecasting increases under uncertain conditions, increasing the demand for private information. The authors then group the analysts according to their underwriting connections, securities company’s proprietary connections and fund connections, and find that the positive correlation between corporate investment behavior and analyst recommendations exists only in the unconnected groups. This is evidence against the hypothesis that analysts have conflicts of interest due to their connections.Originality/valueFirst, the authors link the optimism of analysts with the uncertainty of analysts’ information inputs to partially unpack the black box of analysts’ analyses. Second, the authors test the two hypotheses mentioned. There is a lack of comparative studies on the influence of different motivations on the behavior of analysts.

Diversity on management and supervisory board and accuracy of management earnings forecasts in IPO prospectuses

Motivation: Although the issue of accuracy and bias of earnings forecasts revealed in the IPO prospectuses has attracted attention of many researchers, the literature on the relationship between board characteristics and the quality of such financial projections is still very limited, especially for a two-tier board structure consisting of the management and the supervisory board. The policy of diversity on the boardroom is promoted in many countries and composition of the management and supervisory boards is expected to be comprehensive and diverse, among others, in terms of gender, education, age and professional experience of the members. Aim: The main objective of this study is to analyse the relationship between the accuracy of the earnings forecast disclosed in the IPO prospectus and the diversity of company’s corporate governance institutions. More specifically, we ask a question whether the extent of diversity in the board system features may have an impact on the accuracy of such forward-looking financial information. Results: Using a sample of 104 IPOs from the Warsaw Stock Exchange, we find that certain characteristics of the management and supervisory board enhance the usefulness of forward-looking financial information from a IPO prospectus, as some of boards characteristics are important for the evaluation of the earnings forecasts credibility at the time of IPO. For example, in accordance with our expectations, the age diversity results in more accurate forecasts. This evidence may be seen as an argument

Analysts’ Cash Flow Forecast Accuracy and Recommendation Profitability

We examine whether analysts who supplement their earnings forecasts with more accurate cash flow forecasts generate more profitable recommendations. Previous research using consensus cash flow forecasts, or the issuance of cash flow forecasts fails to document a significant relation between analysts’ cash flow forecasts and their stock recommendation performance. We argue that analysts’ cash flow forecasts differ in quality and hypothesize that the relative accuracy of an individual analyst’s cash flow forecasts is positively associated with the profitability of that analyst’s stock recommendations. We find that when analysts issue both earnings and cash flow forecasts for a firm, cash flow forecast accuracy predicts stock recommendation profitability even after controlling for earnings forecast accuracy. Our findings are robust to the use of instrumental variables and the use of recommendation change in the analysis. Whether analysts also issue sales forecasts and/or long-term growth forecasts does not affect the results.

Can New Auditing Standards Improve the Information Environment of the Capital Market? Based on the Accuracy of Analyst Earnings Forecast

Traditional audit reports express audit opinions only by standardized texts, which makes them lack of value. In December 2016, the Ministry of Finance issues 12 new auditing standards, which include Communication of Key Audit Matters in the Independent Audit Reports, aiming to improve the information of audit reports and to reduce the information gap between companies and investors. A+H share listed companies are required to implement the new auditing standards from January 1, 2017. Many scholars study the impact of the new auditing standards on audit report users, such as investors, auditors, etc. (Louis-Philippe, et al., 2014; Christensen, et al., 2014; Wang and Li, 2019). Compared with general report users, analysts as information seekers and interpreters of the capital market (Chen and Liu, 2017), are more professional and sensitive to accounting and auditing information. Due to the high cost of private information acquisition for majority analysts, public information, such as annual reports and audit reports, is the primary source of information. The new auditing standards require auditors to disclose more audit information, especially the disclosure of key audit matters. It improves the information environment of the capital market by increasing the disclosure of the select reason of key audit matters, how to deal with them and the specific audit procedures. Then, can the implementation of the new auditing standards improve the information environment of the capital market by requiring auditors to provide more audit information, which in turn affects the accuracy of analysts’ earnings forecast? Based on the differences in the time and scope of the implementation of the new auditing standards, we use a difference-in-differences model to study the impact of the implementation of the new auditing standards on the accuracy of analysts’ earnings forecast. The study finds that the implementation of the new auditing standards improve the accuracy of analysts’ earnings forecast at the firm level, and the more key audit matters are disclosed in audit reports, the more significant this effect is. Further analysis shows that: (1) The implementation of the new auditing standards mainly reduces analysts’ optimistic bias forecast. (2) The implementation of the new auditing standards improves analysts’ earnings forecast accuracy at the individual level. (3) The implementation effect of the new auditing standards is more significant in companies with low information transparency. The contributions of this paper are as follows: (1) Using the exogenous event of auditing standard reform, this paper confirms that institutional changes can improve the information environment of the capital market, and further improves the accuracy of analysts’ earnings forecast, which enriches the relevant literature on the influencing factors of analysts’ behaviors (Bradshaw, et al., 2010; Wang and Wang, 2012). (2) This paper provides new empirical evidence on the policy effect of the implementation of the new auditing standards (Lu and Zhang, 2018; Wang, et al., 2018; Wang and Li, 2019), and responds to Defond and Zhang (2014) for the awareness of new audit reports and their value. (3) The documents on analysts are lack of study at the individual level, while this paper provides an analysis of heterogeneity at the individual level, which complements the research on individual analysts and their predictive behaviors. (4) This paper gives a positive evaluation of the new auditing standards’ implementation effect, and provides references and suggestions for the follow-up improvement of the auditing standards. This paper verifies the impact of the implementation of the new auditing standards on the information environment of the capital market. It has some implications for policy-makers and analysts. On the one hand, the conclusions of this paper are helpful for policy-makers to evaluate the policy effect of the new auditing standards. On the other hand, there are some implications for analysts. First, improve the ability of analysts themselves, so as to enhance the influence of analysts in the capital market. Second, strengthen the overall construction of the analyst industry, enhance the overall capacity of the industry, and ensure the healthy development of the analyst industry.

Integrated reporting and capital markets in an international setting: The role of financial analysts

AbstractThis study investigates the interplay between integrated reporting (IR) and capital markets. In particular, building on voluntary disclosure and information processing theories, we hypothesize and empirically find that IR adoption improves analysts' ability to make accurate earnings forecasts. Whereas previous studies focus on the South African context, we rely on an international sample that also allows us to study the moderating effect of the corporate governance regime (shareholder or stakeholder oriented). The results suggest that IR improves analysts' ability to make accurate predictions to a larger extent in North America than in Europe, and we derive interesting insights on the much‐debated nature of IR. This study offers valuable insights to policy makers interested in improving disclosure practices in the financial market.

A Study on the Relationship between Analysts’ Cash Flow Forecasts Issuance and Accounting Information: Evidence from Korea

This study analyzes the relationship between the future cash flow forecast information provided by financial analysts and accounting information. We examine whether the joint issuance of financial analyst earnings forecasts and cash flow forecasts from 2011 to 2015 contributes to the information usefulness of Korean listed firms. The empirical results of this study are as follows. First, the issuance of analysts’ cash flow forecasts and earnings forecast accuracy were significant positive values. Cash flow forecast accuracy and earnings forecast accuracy were significant positive values. Second, the issuance of analysts’ cash flow forecasts and buy–sell bid spread are significant negative values. These results show that the information asymmetry between the manager and the investor can be reduced based on the rich information environment. This study suggests that cash flow forecasting information of financial analysts provides important evidence for capital market participants because it provides evidence that capital market participants’ information can be used as useful information for economic decision-making. These results show the sustainability of a firm from the viewpoint of a financial analyst who acts as an intermediary and external supervisor in the capital market. In addition, the analysts’ cash flow forecasting information is expected to reduce the information asymmetry between the company and the investor, thereby increasing the transparency and sustainability of the firm.

Ties That Bind: The Value of Professional Connections to Sell-Side Analysts

We examine professional connections among executives and analysts formed through overlapping historical employment. Analysts with professional connections to coverage firms have more accurate earnings forecasts and issue more informative buy and sell recommendations. These analysts are more likely to participate, be chosen first, and ask more questions during earnings conference calls and analyst/investor days. Homophily based on gender, age, and ethnicity is orthogonal to professional connections. Brokers attract greater trade commissions on stocks covered by connected analysts. Firms benefit through securing research coverage and invitations to broker-hosted investor conferences emulating from these connections. This paper was accepted by Lauren Cohen, finance.

Analysts’ Beauty and Performance

We study whether sell-side financial analysts’ physical attractiveness is associated with their job performance. We find that attractive analysts make more accurate earnings forecasts than less attractive analysts. Moreover, more attractive analysts make stock recommendations that are more informative in the short run and more profitable in the long run. Additional analyses reveal that attractive analysts attain their better job performance at least partly through their privileged access to information from firm management. For the sources of the beauty effect, we find that more attractive analysts gain more media exposure, have better connections to institutional investors, and receive more internal support from their employers. Additional evidence suggests that analysts’ physical appearance per se at least partly explains our findings. Overall, our study shows that physical attractiveness has a profound impact on the job performance and information access of sell-side financial analysts. This paper was accepted by Shiva Rajgopal, accounting.

Do Auditor’s Efforts of Interim Review Curb the Analyst Forecast’s Walkdown?

This study examines whether auditors restrain the analysts' opportunistic behavior as reviewing the companies' interim reports. Analysts' forecasts show a walkdown pattern in which their optimism has decreased as the earnings announcement date has approached. At the beginning of the year, there is a lack of high-quality benchmark information that enables information users to judge the accuracy of analyst's earnings forecasts. Thus, early in the year, analysts are highly inspired to disseminate optimistic forecasts in order to gain manager's favor. In this study, we examine adequate benchmarks prevent analysts from disclosing optimistically biased forecasts. We conjecture that auditors' efforts might mitigate analysts' walkdown pattern. To test this hypothesis, we use data from Korea, where it is mandatory to disclose auditor's review hours. We find that the analyst forecast's walkdown decreases with the ratio as well as the number of audit hours. It implies that an auditor's effort in reviewing interim financial information has a monitoring function that reduces analysts' opportunistic optimism at the beginning of the year. We conjecture that the tendency will be more pronounced when BIG4 auditors review the interim reports. Consistent with the prediction, BIG4 auditors' interim review effort is more effective in suppressing the analysts' walkdown.

Accuracy in the Air: Pollution and Analyst Forecasts

We investigate the causal impacts of air pollution on analyst forecast accuracy around earnings announcements. Using the air quality index in analyst workplaces, we provide direct evidence of the following. First, air pollution significantly reduces analysts’ earnings forecast accuracy in response to earnings announcements. Second, we introduce thermal inversion and wind force as instruments of air pollution to alleviate endogeneity, thereby establishing causality. Third, our findings are particularly pronounced in companies with more complications and for analysts who are younger, have lower levels of education, and are male. Furthermore, they are robust to alternative measures and different specifications. Overall, our findings contribute to the broader psychology and economics literature on the economic impacts of air pollution on analyst forecasts.

CEO internal experience and voluntary disclosure quality: Evidence from management forecasts

AbstractInternally‐promoted CEOs should have a deep understanding of their firm's products, supply chain, operations, business climate, corporate culture, and how to navigate among employees to get the information they need. Thus, we argue that internally‐promoted CEOs are likely to produce higher quality disclosure than outsider CEOs. Using a sample of US firms from the S&P1500 index from 2001 to 2011, we hand‐collect whether a CEO is hired from inside the firm and, if so, the number of years they worked at the firm before becoming CEO. We then examine whether managers with more internal experience issue higher quality disclosures and offer three main findings. First, CEOs with more internal experience are more likely to issue voluntary earnings forecasts than those managers with less internal experience as well as those managers hired from outside the firm. Second, CEOs with more internal experience issue more accurate earnings forecasts than those managers with less internal experience as well as those managers hired from outside the firm. Finally, investors react more strongly to forecasts issued by insider CEOs than to those issued by outsider CEOs. In additional analysis, we find no evidence that these results extend to mandatory reporting quality (i.e., accruals quality, restatements, or internal control weaknesses), perhaps because mandatory disclosure is subjected to heavy oversight by the board of directors, auditors, and regulators. Overall, our findings suggest that when managers have work experience with the firm prior to becoming the CEO, the firm's voluntary disclosure is of higher quality.

Ties That Bind: The Value of Professional Connections to Sell-Side Analysts

We examine professional connections among executives and analysts formed through overlapping historical employment. Analysts with professional connections to coverage firms have more accurate earnings forecasts, and issue more informative buy and sell recommendations. These analysts are more likely to participate, be chosen first, and ask more questions during earnings conference calls and analyst/investor days. Homophily based on gender, age and ethnicity is orthogonal to professional connections. Brokers attract greater trade commissions on stocks covered by connected analysts. Firms benefit through securing research coverage and invitations to broker-hosted investor conferences emulating from these connections.

Board characteristics, IFRS adoption and voluntary disclosure: evidence from management forecasts accuracy in France

In this article, we examine whether the IFRS adoption and the strong corporate board contribute effectively to reduce the information asymmetry by enhancing the quality of voluntary disclosure in the case of French IPOs. Our measure of disclosure quality is denoted by the absolute forecast error as a proxy for management earnings forecasts accuracy. We find evidence that the adoption of IFRS gives a credible signal of higher disclosure quality and lower information asymmetry through the improvement of the management earnings forecasts accuracy. Also, we find that the independent and larger boards do play an important role in promoting corporate transparency by conveying more accurate earnings forecasts. These findings suggest that future shareholders can benefit from receiving better forecasts. Accurate management forecasts can allow them to identify the companies they want to invest in, and to reduce the costs of adverse selection that they have to face.

Harnessing Aspect-Based Sentiment Analysis: How Are Tweets Associated with Forecast Accuracy?

For firms in the consumer sector of the economy, tweets about service quality reflect consumer satisfaction, which determines firms’ future earnings. Our study responds to anecdotal evidence indicating that analysts have adopted opinion mining to scrutinize Twitter data in order to detect shifts in consumer behavior and make earnings forecasts. If this anecdotal evidence is accurate, certain tweet characteristics may be associated with the accuracy of earnings forecasts for these firms. Our study draws on the literature on consumer satisfaction and firm earnings to identify possible tweet characteristics and hypothesize their associative relationships with analyst forecast accuracy. We use the airline industry as the study context and extract tweets related to airline service quality from publicly available Twitter data and analyst forecast data from the Institutional Brokers’Estimate System Academic. We apply content analysis, followed by aspect-based sentiment analysis, to the downloaded tweets. Using regressions, we find that the breadth of coverage and the number of posters are associated positively with forecast accuracy. The valence of tweets differentiates their effects on forecast accuracy: negative tweets enhance forecast accuracy to a greater extent than do positive tweets. We do not detect any association between tweet subjectivity and analyst forecast accuracy. There is a marginal negative association between tweet dispersion and forecast accuracy.We conclude by discussing theoretical and practical contributions

Do Analysts Gain an Informational Advantage by Visiting Listed Companies?

ABSTRACTWe examine the improvements in forecast accuracy that result from analysts' visits to listed companies. We find that company visits significantly enhance the accuracy of the analysts' earnings forecasts for those companies. The benefit from company visits is more pronounced for companies that are more neglected or less accessible and for brokerage firms that face less pressure for optimistic forecasts from buy‐side clients. Our results are robust and remain significant after controlling for endogeneity and selection bias. Overall, our findings show that private interactions with company management provide analysts with an informational advantage and suggest that company visits facilitate the mosaic approach to information acquisition.

Firm Credit Ratings and Financial Analyst Forecast Performance

This study examines the relationship between firms’ credit ratings and financial analyst earnings forecast performance. We hypothesize and find that high firm credit ratings, which represent low task complexity and low solvency risk, are associated with less dispersion and more accurate earnings forecasts, while low credit ratings are associated with more dispersion and less forecast accuracy. The results of this study are useful to market participants by revealing the increased (decreased) value of information contained in financial analysts’ forecasts when firms have received high (low) credit ratings. DOI: 10.15458/85451.69

An empirical investigation into the impact of Shari’ah-compliant status and Muslim directorship on the accuracy of IPO management earnings forecasts

PurposeIslam stresses on the practice of transparency and sufficient disclosure particularly when it concerns the ethical identity of Islamic institutions. This is to make sure that the activities conducted in business adhere to Shari’ah principles. The purpose of this paper is to examine the impact of Shari’ah-compliant status on the accuracy of initial public offering (IPO) earnings forecasts and to investigate the effect of the existence of Muslim directors on IPO companies’ board of directors on the accuracy of earnings forecasts.Design/methodology/approachThis study makes use of absolute forecast error as a proxy for earnings forecast accuracy. As obtained from the list of Shari’ah-compliant securities established by the Shari’ah Advisory Council of the Malaysian Securities Commission, the study sample comprised 190 Shari’ah-compliant and non-compliant IPOs. The collected data were analyzed through univariate analysis and ordinary least squares regression.FindingsThe initial findings show that during the study period, the earnings forecasts of Malaysian IPOs are accurate to some level, although such level is still unsatisfactory. The findings also showed that Shari’ah-compliant status and Muslim directorship do not positively affect the accuracy of IPO earnings forecasts.Practical implicationsThe findings of the study provide some implications for regulators, financial analysts, investors and users of financial statements, particularly those desirous of investing in Islamic capital market.Originality/valueThe present study provides a new and far-reaching contribution into the debate about the earnings forecasts disclosure in the context of Islamic ethical perspective. In addition, this study is considered as the first study to extend IPO literature by examining the impact of Shari’ah-compliant status and Muslim directorship on the accuracy of management earnings forecasts disclosed in the IPO prospectus.

Causal language intensity in performance commentary and financial analyst behaviour

AbstractWe use automated techniques to measure causal reasoning on earnings‐related financial outcomes of a large sample of MD&A sections of US firms and examine the intensity of causal language in that context against extent of analyst following and against properties of analysts’ earnings forecasts. We find a positive and significant association between a firm's causal reasoning intensity and analyst following and analyst earnings forecast accuracy respectively. Correspondingly, analysts’ earnings forecast dispersion is negatively and significantly associated with causal reasoning intensity. These results suggest that causal reasoning intensity provides incremental information about the relationship between financial performance outcomes and its causes, thereby reducing financial analysts’ information processing and interpreting costs and lowering overall analyst information uncertainty. Additionally, we find that decreases in analyst following are followed by more causal reasoning on performance disclosure. We also find that firms with a considerable increase of causal disclosure especially attract new analysts who already cover many firms. Overall, our evidence of the relationship between causal reasoning intensity and properties of analyst behaviour is consistent with the proposition that causal reasoning is a generic narrative disclosure quality characteristic, able to provide incremental information to analysts and guide analysts' behaviour.

The impact of IFRS 8 on financial analysts’ earnings forecast errors: EU evidence

While the IASB has eliminated virtually all differences between US GAAP and IFRS with respect to segment reporting, the quality of segment disclosure after IFRS 8 remains questionable, with the European Parliament only endorsing IFRS 8 after considerable scrutiny and debate. We investigate the impact of segment information quality and quantity on analysts’ earnings forecasts after the adoption of IFRS 8. We further address how country-level enforcement influences this relationship using a sample from EU countries. Findings reveal that the quality and quantity of segment information are associated with more accurate earnings forecasts following IFRS 8. Furthermore, the results suggest that enforcement plays a pivotal role in shaping the impact of the principles-based IFRS 8. These findings contribute to the ongoing debate on the quality of segment information under the management approach and the role of accounting regulation enforcement. They also provide early evidence on the usefulness of country-by-country reporting.

IFRS 의무도입 후 이익 정보력이 재무분석가의 이익예측의 정확성에 미치는 영향

IFRS 의무도입 후 이익 정보력이 재무분석가의 이익예측의 정확성에 미치는 영향