Bias In Earnings Research Articles

Crowdsourced Forecasts and the Market Reaction to Earnings Announcement News

ABSTRACT This study examines whether crowdsourced forecasts of earnings and revenues help investors unravel bias in earnings announcement news, which is commonly derived from analyst forecasts. Our results suggest that investors, on average, understand and price the predictive signals reflected in crowdsourced forecasts about the bias in analyst-based earnings and revenue surprises. Using the staggered addition of firms to the Estimize platform, we find that crowdsourced coverage is associated with reductions in the mispricing of forecast bias and declines in earnings announcement premia. We further find some evidence that managers use income-increasing accruals to meet the crowdsourced forecast benchmark and that they respond to crowdsourced coverage through increased downward earnings and revenue guidance. Overall, we conclude that user-generated content on crowdsourced financial information platforms helps investors discount biases in traditional equity research and thereby better process the news in earnings announcements. JEL Classifications: G14; G20; M41.

Stock dividend and analyst optimistic bias in earnings forecast

Abundant research has found optimistic bias in analysts’ earnings forecasts. Using a sample of Chinese listed companies from 2008 to 2017, this paper investigates how stock dividend affects analyst’s optimistic bias in earnings forecast. We find that analysts bias their earnings forecasts optimistically after stock dividends. Further study demonstrates that the influence of stock dividend on analyst’s optimistic bias is more significant when the company has less institutional stock holdings or when the analyst is in a small brokerage firm. The bias is moderated when the forecast is issued by a star analyst in a bull market. Mechanism analysis reveals that analysts issue optimistic forecasts for the interests of their own rather than unconsciously. The findings of this study indicate that self-interest motivates analysts to issue biased earnings forecasts, which ultimately reduces the efficiency of the capital market.

잠정이익 공시 이익의 체계적·비체계적 편의에 관한 연구 : 중단영업손익을 이용한 분석을 중심으로

잠정이익 공시 이익의 체계적·비체계적 편의에 관한 연구 : 중단영업손익을 이용한 분석을 중심으로

Do Bright-Line Earnings Surprises Really Affect Stock Price Reactions?

Several influential studies have concluded that earnings surprises just to the right or to the left of a hypothesized bright line produce distinct price reactions compared with surrounding earnings surprises because they convey special meaning. In this study, we examine whether previous inferences of asymmetric stock price reactions to bright-line surprises are observed when empirical tests are designed to be consistent with a rational expectations equilibrium. Focusing on a small range of earnings surprises around hypothesized bright lines, we find no evidence of asymmetric price reactions once investors’ ex ante expectation of bias in earnings surprises is controlled. Results from additional tests yield support for the external validity of the theoretical framework underlying our bright-line pricing tests. Our findings suggest simple refinements to traditional bins-comparison and regression tests for asymmetric price reactions to bright-line earnings surprises, which account for necessary conditions implied by a rational expectations equilibrium. This paper was accepted by Mary Barth, accounting.

Determinants of Earnings and Selection into Labor Market by Controlling Selection Bias in Bangladesh

This paper uses the data of Household Income and Expenditure Survey (HIES) 2005 to estimate the determinants of earnings and selection into labor market in Bangladesh. We deal with the selection bias in earnings by using a maximum likelihood system of equations, and a multinomial selection approach is used modeling for selection into the labor market. By instrumenting years of schooling in both the multinomial selection approach and the earnings equations, we deal with reverse causality between educational attainment and earnings. We find that the estimated parameters of the earnings equation under multinomial selection approach differs from ordinary least square (OLS) estimates and a binomial selection procedure. The estimated parameters that vary the most with those related variables have the strongest impact on multinomial selection into the different labor-market statuses. We also find that workers with higher educational attainment are more likely to search out a salaried employees’ job, which non-salaried work is as another to inactivity. DOI: http://dx.doi.org/10.3329/dujs.v62i1.21953 Dhaka Univ. J. Sci. 62(1): 11-16, 2014 (January)

Impact of audit quality and ownership structure on the bias and accuracy of earnings forecasts issued in IPO prospectuses

Purpose – The purpose of this paper is to investigate the impact of audit quality and ownership structure on the degrees of accuracy and bias in earnings forecasts issued in initial public offering (IPO) prospectuses in a frontier market, Bangladesh. Design/methodology/approach – The paper uses both univariate and multivariate tests on the sample of 75 IPOs. The paper employs the tests to see the association between the degree of forecast bias and three corporate governance variables. Findings – The results reveal that the magnitude of earnings forecast bias is significantly explained by issuer, auditor reputation, proportions of capital raised from domestic as well as foreign investors, and whether the IPO firm is a start-up venture. Underwriter prestige, length of the issuing firms' operating history, leverage, whether the firm went public during a stock market boom, and forecast horizon do not appear to be statistically significant in explaining the degree of forecast bias. Originality/value – Although auditor reputation and the proportion of equity retained by pre-IPO owners have been investigated in several studies on IPO forecast accuracy and/or bias, no study has attributed them to corporate governance as a whole by combining auditor reputation, and ownership categories held by small private investors and foreign portfolio investors.

Are proxy interviews associated with biased earnings reports? Marital status and gender effects of proxy

Social science findings routinely rely on proxy-reported economic data in household surveys. A typical assumption is that this information is not biased compared to self-reports, but empirical findings on the issue are mixed. Using a dataset that links workers in the 2004 Survey of Income and Program Participation to their W-2 tax records, we estimate the effects of reporting status (proxy vs. self) on the magnitude and direction of measurement bias in earnings data and explore whether these effects are heterogeneous across gender and marital status. A slight downward bias in proxy-reported earnings is observed; however, these effects are associated with demographic variables. For married workers, proxies do not contribute substantial bias in earnings measurement regardless of the target respondent’s gender. However, for single female workers, proxy interviews are a significant source of downward bias in earnings estimates. The implications of these findings are discussed.

The Impact of Auditors’ Experiences with their Clients on the Consistency and Bias in Earnings Reporting and Auditors’ Independence

Using auditor tenure as a proxy for auditors’ experiences, this paper considers the relationship between auditors experiences with specific clients and financial reporting quality of the clients. We specifically study whether auditors’ experiences with specific clients increase the consistency in earnings reporting, decrease the downward bias in the reported earnings, and increase auditors’ independence. We use the standard deviation of both non-operating and abnormal non-operating accruals for a three year period centered on the current year to measure the consistency in earnings reporting; we use the average of both non-operating and abnormal non-operating accruals for a three year period centered on the current year to measure the relative bias in earnings; we use the change in both non-operating and abnormal non-operating accruals in the two years prior to a seasoned equity offering to measure earnings management. We find that auditors’ experiences are negatively associated with the standard deviation of both non-operating and abnormal non-operating accruals, positively associated with the average non-operating and abnormal non-operating accruals, and negatively associated with the change of non-operating and abnormal non-operating accruals prior to the seasoned equity offering. These results indicate that auditors’ experiences can reduce volatility and bias in earnings reporting, and improve auditors’ independence.