Beat Analyst Forecasts Research Articles

Managerial overconfidence and classification shifting

This study examines whether overconfident CEOs engage in classification shifting. We find that managerial overconfidence is related to an increase in unexpected core earnings via reclassifying recurring expenses as special items. This finding is robust to controlling for firms’ propensity to engage in accruals management and real earnings management, using a subsample of non-zero income-decreasing special items, employing alternative measures of overconfidence, and controlling for CEO and firm fixed effects. We further find that overconfident CEOs are more likely to engage in classification shifting when the incentives are stronger, i.e., when CEOs want to meet or beat analyst forecasts, when CEOs’ pay is highly sensitive to core earnings, and when CEOs have low managerial ability. Overconfident CEOs are also more likely to engage in classification shifting when there are more opportunities for misconduct, i.e., when financial statement comparability is low and when the CEO can use opportunistic special items to misclassify expenses. Overall, we find that overconfident CEOs are intentionally, rather than unintentionally, engaging in classification shifting to boost core earnings.

Redrawing the line: Narrowly beating analyst forecasts and journalists’ co-coverage choices in earnings-related news articles

Do journalists use editorial tools to help investors clarify uncertain earnings performance? This study examines this question in the context of WSJ reporters’ co-coverage choices. Using narrowly beating consensus analyst forecasts as a proxy for earnings evaluation uncertainty, I find that journalists tend to co-cover peers that are more economically related to the announcing firm when it reported earnings that narrowly beat consensus analyst forecasts (“beaters”) than when discussing the earnings of non-beaters. Using intra-day data, I further find that stock investors appear to use the co-covered peers as a benchmark to evaluate the earnings of the beaters but not the earnings of the non-beaters. These findings highlight the usefulness of media’s editorial content to investors.

Local-province chief executive officer and managerial myopia: Evidence from China.

Managerial myopia occurs when executives value short-term benefits to the extent that firm long-run development will be obstructed. Recent studies have shown that the locality effect plays an important role in managerial myopia—local United States chief executive officers (CEOs) who work near their home states are less likely to behave myopically because of more effective monitoring and greater reputation concern. In an emerging market, government policies play a more important role in the strategic planning enterprises. A local CEO may have better understanding of local government’s policies thus makes less short-term decisions. This article adds to this literature by testing whether local-province CEOs in China, i.e., the CEO’s native place or birthplace is in the same province as her company’s headquarters, are also far-sighted. Using data on 470 publicly listed non-state-owned Chinese firms from 2014 to 2018, supportive evidence has been found that non-local-province CEOs in China tend to cut R&D expenses for beating analyst forecasts, reversing earnings decline, or pursuing higher returns. This article also confirms social capital as one mechanism of Chinese local-province CEOs behaving less myopically. This investigation also adds to the literature by revealing a new mechanism that CEO locality in China has a positive and direct bearing on how governments support corporate innovation.

Does the market reward meeting or beating analyst earnings forecasts? Empirical evidence from China

PurposeUsing a sample of 9,898 firm-year observations from 1,821 unique Chinese listed firms over the period from 2004 to 2019, this study aims to investigate whether the market rewards meeting or beating analyst earnings expectations (MBE).Design/methodology/approachThe authors use an event study methodology to capture market reactions to MBE.FindingsThe authors document a stock return premium for beating analyst forecasts by a wide margin. However, there is no stock return premium for firms that meet or just beat analyst forecasts, suggesting that the market is skeptical of earnings management by these firms. This market underreaction is more pronounced for firms with weak external monitoring. Further analysis shows that meeting or just beating analyst forecasts is indicative of superior future financial performance. The authors do not find firms using earnings management to meet or just beat analyst forecasts.Research limitations/implicationsThe authors provide evidence of market underreaction to meeting or just beating analyst forecasts, with the market's over-skepticism of earnings management being a plausible mechanism for this phenomenon.Practical implicationsThe findings of this study are informative to researchers, market participants and regulators concerned about the impact of analysts and earnings management and interested in detecting and constraining managers' earnings management.Originality/valueThe authors provide new insights into how the market reacts to MBE by showing that the market appears to focus on using meeting or just beating analyst forecasts as an indicator of earnings management, while it does not detect managed MBE. Meeting or just beating analyst forecasts is commonly used as a proxy for earnings management in the literature. However, the findings suggest that it is a noisy proxy for earnings management.

Executive equity incentives and opportunistic manager behavior: new evidence from a quasi-natural experiment

This study provides plausible causal evidence on the effect of executive equity incentives on opportunistic manager behavior. I exploit a unique setting created by the introduction of Financial Accounting Standard (FAS) 123R in 2005, which led to an exogenous increase in the cost of option pay, causing a substantial decline in option pay for some firms while leaving others largely unaffected. Using difference-in-differences analyses with a treatment group of firms that show a decline in option pay and two control groups, I find that the likelihood of a treatment firm meeting or beating analyst forecasts decreases by 14–20%. The results show that the relatively high levels of meet-or-beat before FAS 123R were largely driven by real activities manipulation such as abnormal asset sales and sales manipulation to beat analysts’ benchmarks, while accrual manipulation and analyst management were less relevant. Together, the results suggest that equity incentives encourage opportunistic actions to meet or beat earnings expectations, and a decline in option pay results in a decline in earnings management to meet earnings expectations.

Managerial tools used to meet or beat analyst forecasts: Evidence from the UK

This paper examines the tools that managers use to meet or beat analyst forecasts in the post-International Financial Reporting Standards (IFRS) period, using a sample of UK firms for the period 2005 to 2015. Our results are consistent with the view that managers utilize both classification shifting and managerial guidance to hit analyst forecasts. The results suggest that managers are more likely to continue to exercise their discretion in using these two tools following the adoption of IFRS. This paper supports the argument that managers engage in classification shifting, and IFRS adoption is more likely to increase market demand for more disclosuresthrough managerial guidance. In contrast, there is weak evidence to suggest that real earnings management or accrual earnings management are used to hit analyst forecasts. Our results are expected to be of interest to policymakers, regulators, and external auditors.

Annual Earnings Guidance and the Smoothing of Analysts’ Multi-Period Forecasts

This article examines the use of annual earnings guidance as a mechanism used by managers to reduce the volatility of analyst earnings forecasts and allow them to report smooth earnings without missing quarterly analyst forecasts. Facing the pressure to meet or beat analyst forecasts and driven by the perceived capital market benefits of reporting a smooth earnings path, managers attempting to influence investors’ earnings expectations over a longer horizon can issue annual guidance to smooth the time-series path of analyst forecasts, a strategy we term as “expectation smoothing.” Our empirical results suggest that annual guidance reduces the volatility of analysts’ multi-period forecasts, which in turn contributes to a smoother actual earnings and higher likelihood of meeting analysts’ quarterly forecasts. We also find that issuing quarterly guidance does not affect the smoothness of analysts’ earnings expectations and that managers with longer horizons are more likely to issue annual guidance, consistent with the unique long-term effects of annual earnings guidance.

Accretive Share Repurchases Versus Accrual/Real Earnings Management: Complements or Substitutes?

This paper seeks to address whether managers use accretive repurchases in conjunction with or to the exclusion of other earnings management tools. Prior literature has shown that managers use accretive repurchases to meet or beat analyst forecasts of earnings per share (EPS). However, whether such planned and aggressive repurchasing of common shares outstanding is used as a complement or substitute for traditional tools of earnings management remains unexplored. I find a complementary relationship between accretive repurchases and income-increasing discretionary accruals, a complementary relationship between accretive repurchases and abnormal discretionary expense cuts, and a substitutional relationship between accretive repurchases and abnormal operating cash flow reductions. In addition, I find that the likelihood to use income-increasing discretionary accruals in conjunction with accretive repurchases is significantly driven by the number and dollar amount of stock and stock options awarded to the firm’s CEO in the previous year. I also find that firms with a CFO who is co-opted by the firm’s CEO are more likely to use accretive repurchases than firms in which the CFO is not co-opted by the CEO. This suggests that a CEO likely influences the CFO to make capital allocation decisions that benefit the CEO, but may not be in the best long run interests of the firm. Finally, I find that transient investors strongly predict whether a firm uses accretive repurchases, suggesting that managers use this tool to avoid price pressures imposed by not hitting quarterly forecasts of EPS.

East, West, Home's Best: Do Local CEOs Behave Less Myopically?

ABSTRACT We test whether CEOs working near their childhood homes are less likely than nonlocal CEOs to make myopic decisions. Place attachment theories suggest that people develop mutual caretaking relationships with their birthplaces. Also, executive labor markets face less information asymmetry about local CEOs, resulting in lower pressure on local CEOs for quick profits. Consistent with the prediction, we find that local CEOs are less likely to cut R&D expenditures for beating analyst forecasts or avoiding earnings decreases. In their last year of office, local CEOs are significantly less likely to cut R&D than nonlocal CEOs. The CEO locality effect is stronger when more local business interests are embedded in the firm and when the residents of the CEO's birth state have stronger local social bonds. Local CEOs' longer horizons are consistently manifested in their other decisions, such as paying more state tax and being more socially responsible in business operation. JEL Classifications: G10; G23; M40.

Impact of Auditor Report Changes on Financial Reporting Quality and Audit Costs: Evidence from the United Kingdom

ABSTRACTWhile substantial revisions to auditor reporting requirements are being implemented internationally, the impact of these reforms on financial reporting quality is unknown. We exploit the United Kingdom's recent auditor reporting changes and find that the United Kingdom's new reporting regime is associated with an improvement in financial reporting quality as proxied by significant decreases in absolute abnormal accruals and the propensity to just meet or beat analyst forecasts, and a significant increase in earnings response coefficients. As for audit costs, we do not find a significant change in audit fees or audit delay surrounding the implementation of the new reporting regime. Taken together, the results of this study suggest that new auditor reporting requirements are associated with a significant improvement in financial reporting quality without detecting a significant increase in audit costs.

SEC Non-GAAP Comment Letters and Firm Disclosures

Is the SEC’s non-GAAP comment letter process effective? Specifically, what are the determinants of non-GAAP comment letters and how do managers respond? We find that the SEC issues comment letters to firms with larger differences between Street and GAAP earnings, but is less likely to issue to firms with Big 4 auditors. Managers respond by issuing longer earnings announcements that are more difficult to read. Importantly, managers do not reduce the strategic nature of non-GAAP reporting (that is, there are no reductions in differences between Street and GAAP earnings nor the likelihood of meeting or beating analyst forecasts). Perhaps most importantly, firms receiving non-GAAP comment letters are more likely to receive non-GAAP comment letters again in the following three years, but are not more likely to receive GAAP comment letters, consistent with ongoing noncompliance in non-GAAP disclosures. These results should be of interest to both academics and regulators interested in non-GAAP comment letters.

Misuse of non-mandatory earnings reporting by companies

PurposeThe purpose of this paper is to examine the possibility of South African companies listed on the Johannesburg Stock Exchange (JSE) using adjusted earnings as a part of an impression expectation management strategy focused on demonstrating how reported earnings measures meeting or beating analysts’ earnings forecasts.Design/methodology/approachA multiple response analysis approach is used. Earnings adjustments are coded according to a defined typology and assessed for their status as either valid or invalid. The number of occurrences of adjusted earnings measures over a five year period (2010-2014) meeting or beating analyst forecasts is calculated.FindingsThe use of adjusted earnings by JSE listed companies is a common occurrence. There is evidence to suggest that this is used part of an impression expectation management strategy. Most of the adjustments are invalid. When otherwise valid adjustments are used in a particular year, these are frequently repeated, and when adjusted earnings are reported, these normally exceed analysts’ forecasts.Research limitations/implicationsThe paper is based on a relatively small sample from a single jurisdiction and limited time period. Nevertheless, the findings point to the need to revisit how financial performance is measured and reported, evaluate additional regulation to protect investors and understand in more detail exactly how and why companies use adjusted earnings as an impression expectation management tool.Originality/valueThe paper adds to the limited body of research on performance reporting outside of the USA and Europe. It also examines the use of adjusted earnings in a unique setting where, in addition to IFRS numbers, companies are required to report a mandatory adjusted earnings figure (headline earnings).

Analyst Forecast Accuracy and Earnings Management

This paper investigates the reciprocal or endogenous relationship between earnings management and analyst forecast accuracy. Earnings number is one of the most referred information especially in relation to investment decision-making. Financial analysts use earnings number and its trend in coming up with their forecast. The quality of earnings reported hence may affect the accuracy of forecast made by analysts. Quality of reported earnings is often indicated by earnings management. One of the motivations to manage earnings is to meet or beat analyst forecasts. If analysts failed to account for earnings management, it is possible that earnings manipulation in the previous year may mislead analysts and affect forecast accuracy for current and/or future years. Thus, relationship between earnings management and forecast accuracy could be endogenous or reciprocal, where managers react upon analysts’ forecasts and analysts use reported earnings to make forecast. Previous research on this area assume earnings management and forecast accuracy as exogenous variables. This study on the other hand incorporates the reciprocal relationship between analyst forecast accuracy and earnings management in examining whether analysts can detect earnings management. The relationship between earnings management and analyst forecast accuracy of 110 firms listed on Main board of Bursa Malaysia from 2007 to 2012 is analyzed using dynamic panel system Generalized Method of Moments (GMM) estimator. The year 2007 to 2012 is chosen because this represents the period of convergence from MASB to MFRS. Result indicates that meeting or beating the forecast is one of the incentives for earnings management although not a strong incentive. On the other hand, earnings management significantly influence forecast accuracy, indicating that somehow, analysts trust the reported earnings. This study adds to the literature by addressing the possible endogenous and dynamic relationship between earnings management and analyst forecast accuracy.

The Bright Side of Earnings Management

This paper demonstrates the usefulness of earnings management in correcting stock underpricing. We find that underpricing, measured using mutual fund fire sales or the 2003 trading scandal as a shock, increases the likelihood of firms meeting or marginally beating analyst forecasts. Firms beat earnings targets by cutting R&D as well as making income-increasing reporting choices, but lean towards R&D reduction if reporting manipulation becomes costly. While both types of manipulation accelerate price reversal after fire sales, firms cutting R&D underperform those using accruals in the long-run. These results suggest that reporting discretion can sometimes be desirable to avoid real consequences.

Changes in Accounting Estimates: Are the Current Disclosure Requirements Sufficient to Deter Managerial Opportunism?

In light of the concerns about inherent measurement uncertainty and subjectivity embedded in accounting estimates and the demand for new auditing standards on accounting estimates, this study provides detailed documentation of firms’ practice in making material changes in accounting estimates (CAEs) – CAEs that are subject to mandatory disclosure in accordance with Accounting Standard Codification 250 (ASC 250). The result suggests that anticipated impacts of CAEs on earnings in the context of meeting or beating analyst forecasts significantly influence managers’ decision to make CAEs. Regarding the impact of CAEs on earnings attributes, we find that earnings for the CAE quarter is less persistent, suggesting that CAEs are often a one-off adjustment to revenue or expenses. We also find that financial reports are more likely misstated, subject to SEC inquiries (i.e., SEC comment letters), and are more difficult to read. Reflecting auditors’ view on CAEs as a source of audit risk, audit fees increase significantly in the year when the firm makes a material CAE. Finally, abnormal returns around earnings announcements suggest that investors do not fully understand the impact of CAEs on future cash flows in spite of the disclosure requirements – investors only partially discount the meet/beat premiums when the meet/beat is aided by a positive CAE, leaving a significant net benefit to firms. These findings, together, provide strong evidence of managers’ self-serving biases in their CAE decisions and support the need for enhanced CAE disclosure.

The Walk-Down to Beatable Forecasts: International Evidence

We use the framework developed in Richardson et al. (2004) to identify country, firm and analyst characteristics that we expect to be associated with the prevalence of the analyst walk-down forecast pattern. Based on a large sample of 50,649 analysts covering 33,645 firms from 46 countries during 1992-2014, we find that the walk-down pattern positively correlates with country characteristics related to insider trading restrictions and equity sales. It also positively relates to the stock market reward for beating analyst forecasts, firm-level characteristics underlying management concerns with share prices after earnings announcements, and analysts’ incentives to cooperate with management. The effects of these factors on the walk-down pattern are more pronounced in countries with better media-coverage institutions. Overall, these findings suggest that capital market incentives affecting the communication between managers and analysts and the resulting analyst forecast bias involves various forces including a country’s institutional infrastructure, and firm and analyst characteristics.

Family firm and analyst forecasts in an emerging economy

PurposeThe 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/approachThis 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.FindingsThe 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/valueEmerging 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.

East, West, Home's Best: Are Local CEOs Less Myopic?

We test whether CEOs working near their childhood homes (i.e., local CEOs) are less likely than nonlocal CEOs to make myopic investment decisions. Place attachment theories suggest that people develop mutual caretaking relationships with their birthplaces. In addition, executive labor markets face less information asymmetry about local CEOs, resulting lower pressure on local CEOs for quick profits. Consistent with the prediction, we find that local CEOs are less likely to cut R&D expenditures for beating analyst forecasts or avoiding earnings decreases. These results are corroborated by the finding that in their last year of office local CEOs are significantly less likely to cut R&D than nonlocal CEOs. The CEO locality effect is stronger when more local business interests are embedded in the firm, i.e., when the firm’s business is more concentrated in the CEO’s birth state and the residents of the CEO’s birth state have a higher inclination to invest in local firms. The effect is also more significant when the residents of the CEO’s birth state have stronger local social bond, i.e., when the state has lower population mobility and more social capital. Local CEOs’ longer horizons are consistently manifested in their other decisions such as paying more state tax and being more socially responsible in business operation.

The Dark Side of Asset Redeployability: Future Stock Price Crashes

There is tension underlying whether asset redeployability, which refers to the salability of the corporate capital assets of the firm, shapes crash risk. On one hand, greater asset redeployability engenders liquidity benefits that should enhance financial stability, thereby mitigating future stock price crash risk. On the other hand, asset redeployability enables managers to opportunistically exploit asset sales to engage in upward real earnings management in order to hide bad news, which, in turn, increases future stock crash risk. We find that, on average, asset redeployability is positively associated with stock price crash risk, suggesting that relying on redeployable assets to orchestrate upward real earnings undermines shareholders’ interests. Reinforcing that real earnings management explains the positive association between asset redeployability and stock price crash risk, we find that this association is stronger for firms experiencing greater internal and external pressure to manage earnings. In additional evidence supporting the real earnings management channel, we find that asset redeployability is associated with a higher likelihood of just meeting or beating analyst forecasts, and recording of gains from asset sales. We contribute to extant research by providing evidence implying that asset redeployability has a dark side stemming from managers’ incentives to suppress bad news, particularly when internal and external forces motivate them to manage real earnings upward.

Are Accounting Choices a Way to Meet or Beat Analyst Forecasts Alternative to Earnings Management? Evidence from the Adoption of IAS38 for Brand Measurement

Are Accounting Choices a Way to Meet or Beat Analyst Forecasts Alternative to Earnings Management? Evidence from the Adoption of IAS38 for Brand Measurement