Analyst Earnings Forecasts Research Articles

Common institutional ownership and analyst earnings forecasts

This research investigates the impact of shared institutional ownership on the accuracy of analysts' predictions. Drawing from theoretical frameworks, we have formulated and empirically tested our research hypotheses. The results indicate a negative correlation between shared institutional ownership and the precision of analysts' forecasts. Additionally, peer pressure has been found to mediate this relationship. Furthermore, ownership type has been identified as an intermediary factor, with state-owned enterprises exhibiting a more significant negative effect.

The Differential Effects of Multiple Goals: Aspirations vs Analyst Earnings Forecasts

The Differential Effects of Multiple Goals: Aspirations vs Analyst Earnings Forecasts

Retail investor attention and analyst earnings forecasts: Evidence from China

This article examines the impact of retail investor attention on analyst earnings forecast accuracy. Using a dataset of 21,238 firm-year observations from the Chinese A-share listed firms between 2011 and 2021, we find that future analyst forecast error and dispersion are higher for firms with higher search volumes on the internet, suggesting that retail investor attention has a significant negative impact on analyst earnings forecast accuracy. Further analysis shows that higher retail investor attention could impair the stock price informativeness and induce a greater level of earnings management of the underlying firms, supporting that the informational feedback effect of stock prices and opportunistic behaviors of firm managers are possible mechanisms through which retail investor attention deteriorates analyst earnings forecast accuracy. Moreover, our results in heterogeneity analysis reveal that the negative relationship between retail investor attention and analyst earnings forecast accuracy is more pronounced for non-Big4 audit firms, non-shortable firms, and firms that are not in the Mainland-Hong Kong stock connect program.

CEO power and the strategic selection of accounting financial experts to the audit committee

AbstractWe examine the role of CEO power in the appointment of accounting financial experts (AFEs) to firm audit committees. Our results show that firms with powerful CEOs have a lower likelihood of appointing AFEs to their audit committees. In addition, effective AFEs—those characterized by experience, high status, and social independence from the CEO—are less likely to be appointed in firms with powerful CEOs. In the presence of powerful CEOs, effective AFEs are also less likely to be designated audit committee chair. The absence of effective AFEs is associated with the use of accounting discretion by powerful CEOs to meet or just beat analyst earnings forecasts. We find no evidence that AFEs choose to avoid serving on the boards of firms with powerful CEOs. Our findings are consistent with powerful CEOs influencing board appointments post‐Sarbanes‐Oxley Act through informal channels, including through their social ties with nominating committees. Our results suggest that current regulations prohibiting CEO involvement in the director nomination process and specifying who qualifies as a financial expert may be insufficient to ensure audit committee effectiveness and financial reporting quality.

Learn from peers? The impact of peer firms' analyst earnings forecasts on a focal firm's corporate investment efficiency

We explore whether a firm can learn from information on peers produced by analysts. Based on a sample of Chinese firms, we document that analyst earnings forecast accuracy (dispersion or optimism) of peer firms is positively (negatively) associated with the focal firm's investment efficiency. The effect is more salient when the focal firm operates in a competitive industry, when analysts are predicting positive earnings, when peers produce low-quality annual reports, or when the focal firm has high information asymmetry. Overall, our findings provide new insights on learning from peer information produced by a third party and show that analyst earnings forecasts have spillover effects in the product market.

Performance commitments and the properties of analyst earnings forecasts: Evidence from Chinese reverse merger firms

We investigate whether the performance commitments in Chinese reverse merger (RM) transactions affect the properties of analyst earnings forecasts. All RM firms in China are required to make performance commitments for a limited number of years after being publicly listed. As performance commitment is an important piece of public information, it can influence analysts' understanding of firms and their efforts to forecast earnings. Using manually assembled information on RM transactions, we find that, in comparison to the control firms, RM firms exhibit an increase in analyst forecast error and dispersion after the end of performance commitment. This effect is more pronounced in firms with lower levels of information transparency. We also document that the public information contents of analyst forecasts decrease and forecast revisions increase in the post-commitment period, while the private information content of analyst forecasts and the number of their firm visits remain unchanged. Overall, our findings suggest that analysts rely greatly on public information; they have important implications for academics and policymakers in understanding how performance commitments in RM transactions affect the market information environment.

Accounting Estimation Intensity, Auditor Estimation Expertise, and Managerial Bias

SYNOPSIS We examine the relation between the accounting estimation intensity (AEI) ingrained in a company’s financial reports and the company’s propensity to meet or beat analyst earnings forecasts and whether this relation is attenuated by the auditor’s estimation expertise at the city-office or national level. Although we find a positive relation between AEI and the propensity to meet analyst forecasts, we find little evidence to suggest that the relation is weakened by auditor estimation expertise. Along the same lines, we find little evidence to suggest that the positive relation between AEI and audit fees is affected by auditor estimation expertise. Our findings are of potential interest to regulators concerned about insufficient auditor skepticism in the audit of accounting estimates, investors interested in better understanding managerial accounting judgments, and academics investigating audit quality. JEL Classifications: M41; M42.

Does public corruption affect analyst forecast quality?

Using U.S. Department of Justice (DOJ) data on corruption convictions of government officials, we study the effect of public corruption on analyst forecast quality. We find that analyst earnings forecasts for firms headquartered in more corrupt states are less accurate. Our results are robust to endogeneity checks and several alternative corruption measures. In our cross-sectional analysis, we find that the negative effect of corruption on analyst forecast accuracy is more pronounced in government contractor firms and firms with weaker internal governance or external monitoring. We further identify two channels through which corruption negatively influences analyst forecast accuracy: Firms in more corrupt states exhibit lower earnings quality and issue less frequent management guidance.

Information gain in alternative data: Evidence from e‐commerce sales and analyst earnings forecasts

AbstractBased on the e‐commerce sales data of A‐share listed firms in China, we explore how e‐commerce sales information affects analyst earnings forecasts. We find that firms' e‐commerce sales information is related to firms' value, increases firms' information transparency, broadens analysts' information channels, and thus improves analyst forecast behavior. Further analysis shows that e‐commerce sales information's positive effect is more significant in firms with high growth ability, low financial information transparency, and without management earnings forecasting. We also find that the positive effect is more salient in the bull market. The findings provide new insights for improving the analyst earnings forecast and offer evidence for the positive significance of e‐commerce sales of alternative data for the capital market in the information era.

Do analysts pay attention to managerial sentiment? Evidence from analysts' following decisions and earnings forecasts

We examine the impact of managerial sentiment on analysts’ following decisions and earnings forecast accuracy. By analyzing the textual tone of management discussion and analysis sections in annual reports to capture managerial sentiment, we find that when managerial sentiment is more positive, firms attract more analyst following, while analysts’ earnings forecasts become more accurate. The findings are robust to firm- and analyst-level forecasts, as well as to alternative metrics of managerial sentiment and analyst earnings forecasts. Additional analysis suggests that the impact is more salient for firms with high-quality information environments and non-star analysts.

Media sentiment divergence and analyst earnings forecasts

ABSTRACT We examine whether media sentiment divergence (MSD), which refers to divergence in sentiment across the media’s coverage of a firm, is associated with the accuracy of analyst earnings forecasts. Our results reveal that the level of a firm’s MSD is positively associated with analyst forecast accuracy. In addition, we find that the time required by analysts to make their first annual earnings forecast is positively associated with MSD, suggesting that analysts need more time to process information from the media. Overall, we provide evidence that heterogeneity in the media’s interpretation of corporate news is an important factor affecting analysts’ forecast.

Analyst Earnings Forecast Optimism during the COVID-19 Pandemic: Evidence from China

Analysts are important participants in the capital market, but there are relatively few studies on the impact of the COVID-19 outbreak on analysts’ behaviors. This article examines the impact of the COVID-19 outbreak on the analysts’ earnings forecast optimism by using a sample of visits to Chinese listed firms during 2019–2020. We find that the analysts’ earnings forecasts become less optimistic and show pessimism after the outbreak of COVID-19. This result is consistent with past research findings that major natural disasters lead to analysts’ forecasts pessimism. However, we also find that the earnings forecasts issued by analysts with on-site visits are more optimistic after the COVID-19 outbreak. The increase in optimism is associated with accounting information transparency, the proportion of tangible assets, and the revenue geographical concentration of the visited companies. Further analysis shows that higher optimism in visiting analysts’ earnings forecasts after the COVID-19 outbreak leads to a positive market response, suggesting that optimism in visiting analysts’ forecasts misleads the market’s resource allocation. We also find that the higher level of optimism in visiting analysts’ earnings forecasts disappeared after the COVID-19 outbreak was well controlled. Overall, our study enriches the study of the impact of COVID-19 on capital markets from the perspective of analysts’ forecast optimism. Investors in other countries should also be aware of the impact of similar phenomena.

Just a short-lived glory?The effect of China's anti-corruption on the accuracy of analyst earnings forecasts

Using a quasi-natural experiment based on the introduction of Rule 18, a key component of China's anti-corruption campaign, this paper finds that the accuracy of analysts' earnings forecasts, especially for firms whose headquarters are located in regions with less developed markets, exhibits improvement after Rule 18. We investigate plausible underlying mechanism and find that after Rule 18, firms improve the quality of information conveyed by reported earnings, become more willing to respond to investors' online questions, and are more likely to have their chairpersons or CEOs attend meetings with analysts during analyst site visits. In addition, compared to the pre-Rule 18, the market reacts more positively to analyst earnings forecast reports for firms that lost political connections due to Rule 18 relative to those for other firms. There is also a decrease in stock price synchronicity after Rule 18. However, these effects of Rule 18 last only one year or two, and disappear three years after the policy. These findings suggest that in the short period after the policy, firms increase their information disclosure to the market. Regarding the disappearance of these effects after a longer period of policy implementation, one possibility is that firms adapt to the new rules over time, finding more covert ways to seek rents and re-establish political ties.

Is silence golden sometimes? Management guidance withdrawals during the COVID-19 pandemic

The many management guidance withdrawals during the COVID-19 pandemic have attracted considerable attention from the media, investors, and regulators. This study analyzes the determinants and consequences of these withdrawals. We find that guidance withdrawals are due to economic uncertainty, resulting from firms’ exposure to the COVID-19 pandemic rather than poor financial performance. Also, the effect of COVID-19 exposure on guidance withdrawals is stronger when firms face higher litigation risk. Further, guidance withdrawals result in abnormally large trading volumes and high analyst forecast dispersion but do not harm stock prices or the level of analyst earnings forecasts. Overall we believe the findings have implications for understanding corporate disclosure practices during periods with heightened economic uncertainty.

The Cost of Capital for Banks: Evidence from Analyst Earnings Forecasts

ABSTRACTWe extract cost of capital measures for banks using analyst earnings forecasts, which we show are unbiased. We find that the cost of equity and the cost of debt decrease in the Tier 1 ratio, whereas total cost of capital is uncorrelated with the Tier 1 ratio. These findings suggest that investors adjust their return expectations for banks in accordance with the Modigliani–Miller conservation‐of‐risk principle. Hence, increased capital requirements arenotmade socially costly based on a notion that market pricing violates risk conservation. Equity can nevertheless still be privately costly for banks because of reduced subsidies.

The Effect of Conditional Management Earnings Forecast Mandates on Voluntary Disclosure and Analyst Forecast Properties

This study examines the effect of a conditional management earnings forecast mandate on voluntary disclosure and the properties of analyst forecasts in China, where firms are required to provide earnings forecasts when they expect to either make a loss, turn from loss into profit, or experience a large change in earnings. We find that firms’ propensity to issue voluntary management earnings forecasts is higher when they anticipate the disclosure of mandatory management earnings forecasts in the future. This relation is stronger for government‐controlled firms. We also find a significant improvement in the quality of analyst earnings forecasts (measured by forecast accuracy and dispersion) for firms that provide voluntary management earnings forecasts, while the disclosure of mandatory management earnings forecasts is negatively associated with analyst earnings forecast quality. We document that this differential effect on analyst earnings forecast quality is attributable to the higher quality of voluntary management earnings forecasts. Further analyses suggest that the positive effect of voluntary management earnings forecasts on analyst earnings forecast quality is larger for firms with a relatively weak existing information environment. Our findings suggest that the conditional mandatory disclosure of management earnings forecasts can incentivize managers to provide voluntary forecasts, and that these voluntary forecasts play a greater role than mandatory management forecasts in improving firms’ external information environment in the Chinese capital market.

Managerial Accounting for Decision-Making and Planning

Managerial Accounting for Decision-Making and Planning

Disclosure of internal control material weaknesses and optimism in analyst earnings forecasts

This paper investigates how analyst forecast optimism is associated with disclosures of internal control material weaknesses (ICMWs) and their remediation under Section 404 of the Sarbanes–Oxley Act (SOX). Drawing on agency theory, I hypothesize that analysts are likely to issue earnings forecasts that are more optimistic for firms with ICMW disclosures than for those without ICMW disclosures. Using a sample of 20,875 firm-year observations with 10-K (10-Q) reports from 2004 to 2018, I find a positive association between ICMW disclosures and analyst forecast optimism. This positive association is partially driven by investors’ inability to unravel analyst forecast bias and analysts’ intentions to curry favor with management for private information. In addition, analysts are found to issue less optimistic forecasts for firms with ICMW remediation disclosures compared with those without ICMW remediation disclosures. A series of propensity score matching and regression analyses are conducted to test the robustness of my inferences. Overall, the paper suggests that analysts have incentives to take the opportunity of firms disclosing ICMWs to bias their forecasts upward for self-interest. The findings have the potential to assist regulators in guiding analyst behavior and educating investors to unravel positive bias in analyst forecasts.

Share pledging and optimism in analyst earnings forecasts: Evidence from China

This study examines the relation between share pledging by controlling shareholders and optimism in analyst earnings forecasts. Using a sample of listed Chinese firms from 2007 to 2018, we find that analysts make more optimistic forecasts for firms whose controlling shareholders have pledged their shares for bank loans and whose share pledge ratio is high. This relation is stronger for firms with poor prior stock performance, for firms located in regions with a high level of marketization, and for analysts who have close connections with firms, but is weaker for reputable analysts and those from larger broker firms. In addition, analyst optimism becomes weaker when the share-pledging loan approaches the end of the term and when the analyst forecast date is closer to the earnings announcement, and becomes more pronounced when analysts make forecasts over a longer horizon. The results suggest that in cases of share pledging, the threat of losing controlling rights creates significant incentives for controlling shareholders to collude with analysts.

Market Reaction to Abnormal Inventory Growth: Evidence for Managerial Decision-Making

ABSTRACT Prior research demonstrates that manufacturing firms increase production (relative to sales) to transfer fixed costs from cost of goods sold (COGS) to inventory accounts, thereby increasing income to reach or surpass earnings thresholds. We examine how the market reacts to this earnings management strategy. We find that investors respond positively to inventory growth based on an expectation of increased future sales; however, this signal is weaker for inventory manipulators. Further, the market premium from meeting or beating analyst earnings forecasts by manipulating inventory is smaller than the premium for achieving this threshold absent inventory manipulation or through accrual manipulation. Finally, we examine firms considered to be “serial” inventory manipulators, finding that the market consistently discounts earnings beats for these firms, suggesting that inventory manipulation erodes investor confidence in firms' earnings. Collectively, our results provide new insights into a challenge facing operations managers and finance managers in manufacturing firms.