Consensus Forecasts Research Articles

Distortions in the Balance Sheet Matter to China’s Growth

In his most recent book, Markets over Mao: The Rise of Private Business in China, Nicholas Lardy carefully compiles and analyzes an enormous amount of data to support his claim that China's private sector, and not the state, has become by far the most important source of recent growth in Chinese productivity and employment. Between 2010 and 2012, Lardy argues, private sector firms produced between two-thirds and three-quarters of China's GDP, far more than the state sector, even as they received a disproportionately low share of resources (pp. 139-41).While reviewers have praised this important book mainly for refuting conventional wisdom on the central role of China's state capitalism, I think they overstate the novelty of Lardy's argument, and in doing so perhaps understate the real value of the book. It is widely known that in spite of limited access to capital, China's small and medium-sized enterprises are highly productive, often extraordinarily so. What is more, worries about the sustainability of the growth in Chinese debt are driven precisely by concerns that the systematic tendency of the public sector to misuse resources-capital, most importantly-has driven down profitability even as debt has risen steeply. That China's private sector produces more with less is not a secret.Rather than reshape our understanding of the relative contribution of China's market and nonmarket sectors, Lardy's real contribution is to document carefully the ways in which the main sources of growth in Chinese productivity and employment have evolved from the centralized decision-making process that was set up more than twenty years ago to provide much-needed infrastructure and manufacturing capacity to one today that includes a highly productive, market-oriented private sector. By describing and explaining this extraordinarily complex and poorly understood story, Lardy also suggests the key reforms on which President Xi Jinping and his administration must focus.Economists who are confident that will maintain rapid growth while successfully rebalancing its economy-including Lardy himself, who argued in an April 30 presentation that China could grow at roughly 8% a year for another 5 or 10 years, against consensus forecasts of 6%-7%1-will agree with Lardy that if China's market sector managed to grow as rapidly as it did in spite of limited access to capital and other resources, simply by reversing these constraints Beijing can ensure rapid growth as China's economy rebalances.But here is the paradox. Those who expect growth to slow significantly, as I do, find Lardy's work no less useful than do his peers in optimism. It is a testament to the objectivity of Lardy's research that we too will praise the quality of his data and agree with much of his interpretation. We will argue, however, that it is precisely because Lardy correctly identifies the reforms required to maintain high growth that we expect growth rates to drop sharply.Economists notoriously ignore history, but history nonetheless suggests that the many attempts among developing countries to impose similar reforms have always proved far more difficult than anyone expected. Because redirecting the flow of resources necessarily undermines institutions that have long controlled access to these resources, in as elsewhere, these institutions prevent reforms from being implemented quickly enough to avoid either much slower growth or a risky increase in the debt burden. Premier Wen Jiabao promised in 2007, after all, to rebalance the economy with similar reforms, and yet China's imbalances deteriorated rapidly during the next five years just as Beijing began denouncing the nefarious role of vested interests.There is a second set of constraints, however, that limit the positive impact of reform in ways I believe Lardy, and most economists, tend systematically to underestimate. While Markets over Mao carefully describes the operations of the Chinese economy-or, put differently, how China's assets are managed-it largely ignores how China's liability structure will affect growth. …

Audit Quality and Analyst Forecast Accuracy: The Impact of Forecast Horizon and Other Modeling Choices

SUMMARYThe accuracy and other properties of analyst earnings forecasts represent potentially useful proxies for the impact of audit quality on client financial reports. Extant research in the auditing literature, however, is characterized by diametrically opposite predictions and inconsistent findings regarding the relationship between audit quality and analyst forecast accuracy. We argue that a potential reason for the inconsistency in the literature reflects these studies' focus on end-of-year forecast accuracy, which is subject to competing effects of audit quality. High-quality auditors may simultaneously improve forecast accuracy through their impact on the decision usefulness of clients' prior period reports, and reduce forecast accuracy by constraining client attempts to manage earnings in the direction of the consensus forecast. We argue and present evidence in support of the conjecture that analysts' beginning-of-year forecasts are a superior metric for identifying the impact of audit quality on the properties of analyst forecasts because the decision usefulness effect of audit quality should be dominant with respect to those forecasts.Data Availability: Data are available from sources identified in the article.

Retraction: The Potential Impact of More Frequent Financial Reporting and Assurance: User, Preparer, and Auditor Assessments

The purpose of this study is to examine some of the potential impacts of more frequent financial reporting and concurrent assurance, as assessed by members of the assurer, preparer, and investor communities. Two hundred and fifteen participants (84 auditors, 30 controllers, 80 investors, as surrogated by MBA students, and 21 sell‐side analysts) took part in an experiment where they received a case situation involving a company that was planning to voluntarily change from quarterly to monthly (daily) external financial statement reporting, without (with) assurance. After reading the case materials, the participants assessed the likely effects of such changes on the decision usefulness of financial statements, quality of earnings, financial reporting behavior, stock market price volatility, analysts' consensus forecasts, and cost of capital. The results indicate that monthly reporting without assurance would significantly enhance the decision usefulness of financial statements, improve the quality of earnin...

Do foreign exchange forecasters believe in Uncovered Interest Parity?

Uncovered Interest Parity (UIP) is typically rejected in empirical studies, but this letter finds nevertheless that Consensus Forecasts of the exchange rate for Central and Eastern European countries are based on UIP. When structural breaks are included, the forecasts are found to deviate from UIP in 2008–09 when financial markets were under severe stress.

Analyst earnings forecast revision activity around profit warnings across four European countries

Purpose– The purpose of this paper is to report on research concerning financial analysts’ activity surrounding profit warnings issued by listed companies in the four largest European stock exchanges (France, Germany, the Netherlands and the UK). The authors address three aspects of analysts’ forecasts: ex-post accuracy of forecasts, earnings forecast revisions, and consensus forecast dispersion. The goal of the analysis is to study the differences between financial analysts’ behavior within different regulatory settings, namely common law vs civil law countries.Design/methodology/approach– The sample is composed of 1,330 profit warnings issued by listed European firms during the period 2000-2010. The authors apply event study methodology and OLS regressions to highlight the impact of the legal information environment on analysts’ reactions.Findings– The empirical analysis reveals that analyst activity depends on each country’s legal context factors, such as the legal information environment of the firm and the index of investor protection. Accordingly, the authors show that both a richer legal information environment and stronger country-level investor protection substantially improve analyst accuracy around profit warnings.Research limitations/implications– The sample is only composed on firms from four European countries owing to a lack of firms from other European countries that disclosed PW during the period 2000-2010. It would be pertinent to conduct future research dealing with an international sample from different continents.Practical implications– The paper contributes to a deeper understanding of analysts’ reactions to profit warnings. The findings can influence firms’ reporting practices and lead to future regulation policies.Originality/value– This work is the first to examine the relationship between profit warning releases and the behavior of financial analysts in a pan-European context where there are different institutional levels of investor protection.

Forecast Uncertainty and the Taylor Rule

In this paper, we derive a modification of a forward-looking Taylor rule, which integrates two variables measuring the uncertainty of inflation and GDP growth forecasts into an otherwise standard New Keynesian model. We show that certainty-equivalence in New Keynesian models is a consequence of log-linearization and that a second-order Taylor approximation leads to a reaction function which includes the uncertainty of macroeconomic expectations. To test the model empirically, we use the standard deviation of individual forecasts around the median Consensus Forecast as proxy for forecast uncertainty. Our sample covers the euro area, Sweden, and the United Kingdom and the period 1992 Q4-2014 Q2. We find that while all three central banks react significantly to inflation forecast uncertainty by reducing their policy rates in times of higher inflation expectation uncertainty with an average effect of more than 25 basis points, they do not have significant reactions to GDP growth forecast uncertainty. We conclude with some implications for optimal monetary policy rules and central bank watchers.

The Predictive Power of Survey‐Based Exchange Rate Forecasts: Is there a Role for Dispersion?

Previous research has shown that the consensus of individual exchange rate forecasts performs no better than many commonly used forecasting models in predicting future exchange rates. Studies on equity and bond markets have explored the effects of dispersion in forecasts on the predictive power of forecasts; however, no earlier paper has investigated such effects in the context of the foreign exchange market. This study explores the role of consensus forecast dispersion as a factor leading to bias and anchoring in exchange rate forecasts. Our analysis of five currency pairs reveals that consensus forecasts mostly appear to be unbiased predictors of exchange rates in the long run, but most are unable to pass tests for short‐run unbiasedness. In three of the five currencies examined it appears that forecasters should take greater account of reported forecast dispersion. Copyright © 2015 John Wiley & Sons, Ltd.

The Future of Worldwide Income Distribution

Combining consensus forecasts of growth of population and real incomes during 2014–35 with household income surveys for more than a hundred countries accounting for the bulk of the world economy, we project the income distribution in 2035 across all individuals in the world. We find that the Gini coefficient of global inequality declined from 69 in 2003 to 65 in 2013, and we project that it will decline further to 61 in 2035, largely owing to rapid economic growth in the emerging-market economies. We project major increases in the potential pool of consumers worldwide, with the largest net gains in the developing and emerging-market economies. The number of people earning between US$1,144 and US$3,252 per year in 2013 prices in purchasing power parity (PPP) terms will increase by around 500 million, with the largest gains in Sub-Saharan Africa and India; those earning between US$3,252 and US$8,874 per year in 2013 prices will increase by almost 1 billion, with the largest gains in India and Sub-Saharan Africa; and those earning more than US$8,874 per year will increase by 1.2 billion, with the largest gains in China and the advanced economies. Using household survey data, we begin to trace the implications of these results for consumption patterns by documenting a positive, convex relationship between per capita consumption and the share of transportation in total consumption, which suggests a more rapid rise in transportation consumption than based on projected GDP growth.

Are Professional Macroeconomic Forecasters Able To Do Better Than Forecasting Trends?

This paper investigates whether survey forecasters are able to make more accurate forecasts than simply supposing that the future values of the variable will move monotonically to the long‐run expectation. We consider the forecasts individually, and the consensus forecasts. Consensus survey forecasts are able to do so to varying degrees depending on the variable, but this ability is largely limited to forecasts of the current quarter.

A Comparison of Between‐Country Measures of Legal Setting and Enforcement of Accounting Standards

AbstractAcademics and practitioners agree that the enforcement of accounting standards has an important role in promoting high quality financial reporting and favourable capital market outcomes. We test three new enforcement proxies from Brown, Preiato and Tarca (2014) that focus specifically on auditing and accounting enforcement. We examine firms’ information environments, represented by the error in analysts’ consensus forecasts and the extent of disagreement among analysts, as indicated by forecast dispersion. For financial years ending from 2003 to 2009, we construct a sample of 357,034 firm–month observations on the errors and dispersion of analysts’ earnings forecasts for 10,769 firms domiciled in those 39 countries. We find that higher scores for all three proxies are associated with lower error and less disagreement in forecasts. In addition, we find that the indices have significant explanatory power when previously used enforcement proxies (such as Kaufmann et al.'s 2010 rule of law measure) are included in the regression models, pointing to the importance of specific measures of accounting enforcement. We conclude that accounting enforcement may be more important in securing favourable economic outcomes than has been previously realised, because researchers commonly have used noisier, more general legal proxies for enforcement that understate its marginal effects.

A Simple Multivariate Filter for Estimating Potential Output

Estimates of potential output are an important ingredient of structured forecasting and policy analysis. Using information on consensus forecasts, this paper extends the multivariate filter developed by Benes and others (2010). Although the estimates in real time are more robust relative to those of naive statistical filters, there is still significant uncertainty surrounding the estimates. The paper presents estimates for 16 countries and provides an example of how the filtered estimates at the end of the sample period can be improved with additional information.

Central Bank Transparency and the Consensus Forecast: What Does the Economist Poll of Forecasters Tell Us?

We are interested, in this paper, in studying the effects that central banks exert on private sector forecasts by means of their transparency and communication measures. We analyze the impact of central bank transparency on the accuracy of the consensus forecasts (usually calculated as the mean or the median of the forecasts from a panel of individual forecasters) for a series of macroeconomic variables: inflation, Real output growth and the current account as a share of GDP for 7 advanced economies. Interestingly, while it is found of significance of central bank transparency and communication measures on forecasts themselves, there appear some limits of the same measures when we study their impact on forecast errors. Our findings, indeed, suggest that deviations of the economic forecast data from the realized ones (RGDP and the current account as a share of GDP) are a bit affected by the central bank transparency measures considered in the paper. Inflation forecast errors, especially, are not affected at all by those measures. A possible explanation (among others) could be attributed to the inefficiency of the mean forecasts. Inefficiency of the consensus forecasts is not a new issue from a theoretical point of view, but its empirical relevance is for the first time (to our knowledge) questioned on data extracted from the Economist poll of forecasters. More particularly, our paper extracts practical implications over the effectiveness of transparent announcements in forecast formation process. We rely on two noisy information models, though having different mechanisms (Kim et al, 2001; Morris and Shin, 2002) both of which are consistent with overweighting issue to explain the inefficiency of the consensus forecast.

Multivariate Filter Estimation of Potential Output for the Euro Area and the United States

Estimates of potential output are an important component of a structured forecasting and policy analysis system. Using information on consensus forecasts, this paper extends the multivariate filter developed by Laxton and Tetlow (1992) and modified by Benes and others (2010) and Blagrave and others (2015). We show that, although still fairly uncertain, the real time estimates from this approach are more accurate relative to those of naive univariate statistical filters. The paper presents estimates for the euro area and the United States and discusses how the filtered estimates at the end of the sample period can be improved with additional information.

A Simple Multivariate Filter for Estimating Potential Output

Estimates of potential output are an important ingredient of structured forecasting and policy analysis. Using information on consensus forecasts, this paper extends the multivariate filter developed by Benes and others (2010). Although the estimates in real time are more robust relative to those of naive statistical filters, there is still significant uncertainty surrounding the estimates. The paper presents estimates for 16 countries and provides an example of how the filtered estimates at the end of the sample period can be improved with additional information.

Meet/Beat Market Expectation, Accounting Conservatism and Corporate Governance

Accounting conservatism has been recognized as a reporting strategy that benefits shareholders and financial statement users. We hypothesize that managers in general are likely to sacrifice the benefit associated with accounting conservatism when adopting meeting/beating market expectations (hereafter MBME). Our findings show a negative association between MBME, proxied by analysts’ consensus forecasts, and accounting conservatism, defined in terms of conditional conservatism (Basu, 1997; Ball and Shivakumar, 2005, 2006) and we show that such relationship is not a mechanical connection between reporting strategy and managerial incentives to report higher earnings. Further analysis show that the negative relationship still exists after controlling for expectation as well as accrual-based and real earnings management. However, we document that G-index (Gompers et al., 2003), reflecting corporate governance in terms of anti-takeover provisions, has a significant impact on the negative association between accounting conservatism and MBME. Such finding shows that firms with less anti-takeover provisions, proxied by G-index, are less likely to sacrifice the benefit associated with conservative accounting for MBME.

Joining the Conversation: How Quiet Is the IPO Quiet Period?

This study evaluates the IPO quiet period, which restricts managers' ability to publicly communicate in the weeks immediately following the IPO. I investigate the effectiveness of and compliance with the quiet period for a sample of 3,380 IPOs from 1996 through 2011, and report several key findings. Firms significantly increase their communication immediately after the quiet period expires, and this manifests in more firm-specific information in returns. While this suggests the quiet period rules are effective on average, I find that there is non-random variation across firms in this effectiveness. In particular, the marginal effect of increased communication on firm-specific information processed by the market is greater for firms which are harder to value or receive less-than-expected attention in the aftermarket. Moreover, notwithstanding overall effectiveness, I find wide variation in the level of compliance with the quiet period, and that firms benefit from non-compliance. In particular, firms with more quiet period "loudness" obtain more analyst attention and are more likely to meet or beat future consensus forecasts. Collectively, the results suggest that [1] the quiet period rules prevent investors from learning useful information in a timely manner, and [2] a lack of SEC enforcement provides advantages to firms that violate the spirit, if not the letter, of the rules. This calls into question whether the IPO quiet period rules — essentially unchanged for over 80 years — remain relevant and useful in modern equity markets.

Predicting US Recessions: Does a Wishful Bias Exist?

There is evidence in the economic literature that near cyclical peaks an optimistic bias exists in private expert forecasts of real GDP growth rates. Other evidence concerns differences in the accuracy of GDP forecasts made during expansions and those made during contractions. It has also been hypothesized that a wishful bias may hamper the ability to recognize the beginning of a recession in real-time. We tested consensus forecasts of quarterly GDP growth rates taken from SPFs conducted by PhilFed and found that they may be seen as unbiased only for time horizons j=0,1,2; for greater horizons they are over-optimistic. This over-optimism may also be observed for (j=1, 2) for forecasts made at peaks (at these moments the consensus usually points only to a slowdown of the economy but not to a contraction). Lastly, over-optimism may be observed for nowcasts (j=0) during cyclical contractions, including the first two quarters of a recession (in these cases the reality is usually worse than expected). Taken together, all these facts mean that some aversion to predicting US recessions exists. There are two possible reasons for this: a) experts rely too heavily on extrapolations (then changes in medium-long tendencies would be missed in real time); b) there is a wishful bias in forecasts against predicting recessions (this reluctance may be rooted in psychological factors). We give some arguments in favor of the thesis that the second factor is more important.

Auditor Sensitivity to Real Earnings Management: An Experimental Investigation

Although real earnings management (REM) is increasingly common, limited research examines how auditors react when they know or suspect that their clients are using REM. In addition, prior research on whether auditors react to REM is not conclusive, nor does it provide strong insights into why auditors would react to REM, given that REM does not violate GAAP. We conduct a 2x3 between-subjects experiment (client Beat or Missed the analysts’ consensus forecast, with three levels of REM: Explicit REM, Potential REM, and No REM) with highly experienced auditors as participants to examine the conditions in which auditors are sensitive to REM. Informed by Correspondent Inference Theory, we predict and find evidence that, when a client beats an EPS target, auditors observing Explicit REM perceive the weakest management tone and assess the highest levels of risk, followed by those observing Potential REM, and then those observing no REM. However, we predict that, when a client misses an EPS target, auditors are less likely to view Potential REM as actual REM. Thus, we find that, when a client misses an EPS target, auditors observing Explicit REM perceive weaker management tone and assess higher levels of risk relative to when they observe Potential REM or when REM is absent. Further, when clients miss the EPS target, we find that auditor responses to Potential REM do not differ from when REM is absent. Finally, we find that auditors’ perceptions of management tone mediate the relation between REM and risk assessments. Overall, the results are consistent with Correspondent Inference Theory and demonstrate how and why auditors respond to REM.

Can We Automate Earnings Forecasts and Beat Analysts?

Can we design statistical models to predict corporate earnings which either perform as well as, or even better than analysts? If we can, then we might consider automating the process, and notably apply it to small and international firms which typically have either sparse or no analyst coverage. There are at least two challenges: (1) analysts use real-time data whereas statistical models often rely on stale data and (2) analysts use potentially large set of observations whereas models often are frugal with data series. In this paper we introduce newly-developed mixed frequency regression methods that are able to synthesize rich real-time data and predict earnings out-of-sample. Our forecasts are shown to be systematically more accurate than analysts' consensus forecasts, reducing their forecast errors by 15% to 30% on average, depending on forecast horizon.

Does corporate governance enhance the appreciation of mandatory environmental disclosure by financial markets?

This paper investigates if mandated disclosure about environmental risks and obligations enhances the information set available to analysts and how a firm’s governance affects such a relation. Government policies mandating such disclosure are potentially a tool to force firms to change their environmental practices, especially if financial markets pick up on the released information and exert pressures upon corporate management for further actions. We focus on 172 non-financial firms subject to mandated environmental disclosure. Results show that mandated disclosure enhances financial analysts’ information set, as proxied by their forecast consensus and overall uncertainty. Analysts seem able to assess if there are inconsistencies between a firm`s disclosure and its environmental impact. Moreover, mandated environmental disclosure substitutes for weak corporate governance in enhancing analysts’ information set. In other words, mandated environmental disclosure does not relate to analysts’ information set in the presence of good governance but does for firms with weak governance. Hence, mandatory disclosure may act as an environmental governance mechanism, either complementing or substituting for a firm’s own governance.