Earnings Estimates Research Articles

Information Acquisition Costs and Analysts’ Cash Flow Forecasts: The Role of Management Cash Flow Forecasts

We examine whether the provision of managerial cash flow forecasts is a significant predictor of analysts’ decision to cover a firm with cash flow forecasts. Unlike managerial earnings forecasts, which are often issued to walk down analyst earnings estimates, managers issue cash flow forecasts to counter bad earnings news and lessen the cost of investor and analyst information acquisition (Wasley & Wu, 2006). Motivated by the increasing popularity of managerial cash flow forecasts and prior empirical evidence that analysts are less likely to follow a firm for which the costs of acquiring financial information are prohibitive (e.g., Liu, 2011), we predict and find that the provision of managerial cash flow forecasts is a significant determinant of the likelihood of analyst cash flow coverage. We also find that analysts are less likely to issue cash flow forecasts when the effort necessary to follow a firm is high. Together, the evidence suggests that the existence of management cash flow forecasts is an important determinant of analysts’ cash flow coverage.

Recommending Career Transitions to Job Seekers Using Earnings Estimates, Skills Similarity, and Occupational Demand

This paper describes a career recommendation algorithm that uses government administrative data to help job seekers discover new careers that similar job seekers have successfully switched to in the past. Algorithm development was motivated by workers and contractors who were displaced by the COVID-19 economic crisis and by workers in declining industries seeking new careers in growing ones. Traditional job boards available through state government websites list all available jobs but do little to remove uncertainty associated with moving to a new industry or occupation. Our recommendation algorithm can lower this uncertainty. It uses causal machine learning techniques and administrative data on the universe of individual-level employment histories and earnings to identify career transitions that have resulted in increased earnings and employment for previous job seekers. We combine these estimates with measures of skill similarity across occupations, derived from natural-language processing of millions of full-text job descriptions, and with occupational demand, as measured by nightly job posting volume. The algorithm parses applicant resumes and returns recommended careers that use similar skills, have available jobs, and are estimated to lead to higher earnings and employment. We have implemented our algorithm in production workforce development systems in five U.S. states.

Herding the crowds: how sentiment affects crowdsourced earnings estimates

AbstractThis study investigates the impact of firm-level investor sentiment derived from Twitter and news media on herding behavior among contributors on Estimize, a leading platform for crowdsourced earnings forecasts. The findings show that sentiment gleaned from tweets and news media content positively influences herding among Estimize contributors. Notably, herding intensifies when Twitter and news sentiment polarities align, while divergent sentiment polarities diminish this herding effect. Additionally, the analysis indicates that firms with investment-grade ratings and those characterized by low valuation uncertainty are particularly prone to sentiment-driven herding. Importantly, positive sentiment is identified as having a more potent influence on herding behavior than negative sentiment. By focusing on Estimize contributors, this study offers insights into how firm-level sentiment cues shape the crowd’s herding behavior, offering new perspectives on how different media sources shape the wisdom of the crowd.

Abnormal Disclosure Tone in MD&A and Analysts’ Earnings Forecast: Evidence from China

ABSTRACT This study examines the association between abnormal disclosure tone in the Management Discussion and Analysis (MD&A) section of annual reports and analysts’ forecasting behavior. Using analysts’ forecast data of Chinese listed firms from 2008 to 2020, we find that analysts can discern abnormal tone in managers’ disclosures, leading to a downward revision of earnings estimates and an enhancement of forecast accuracy. Moreover, we observe that abnormal tone in the MD&A section attracts analysts’ attention as they navigate the challenges posed by tone management and diminished information transparency. Collectively, this paper enhances our understanding of analysts’ forecasting behavior concerning the extent of tone management observed in MD&A disclosures within emerging markets.

Estimated impact of ECHELON-1 overall survival on productivity costs in stage III/IV classical Hodgkin lymphoma in the United States.

A 2010 study on the impact of cancer mortality on productivity costs found Hodgkin lymphoma to have the second largest productivity cost lost per death in the United States. The ECHELON-1 trial demonstrated that frontline brentuximab vedotin, doxorubicin, vinblastine, and dacarbazine (A+AVD) improves overall survival (OS) vs doxorubicin, bleomycin, vinblastine, and dacarbazine (ABVD) in stage III/IV classical Hodgkin lymphoma (cHL), reducing the risk of death to 41% (hazard ratio = 0.59; 95% CI = 0.40-0.88; P = 0.009). To assess the estimated impact of frontline treatment choice on mortality and productivity using an oncology simulation model informed by ECHELON-1 data. Individual productivity was estimated using the human capital approach and reported via present value lifetime earnings (PVLE) estimates. Deaths avoided and lifeyears saved without and with A+AVD were calculated using a model informed by realworld treatment use, treatment-specific OS, and expert clinicians' opinions. A+AVD use in the base case was 27% (range: 0%-80%). Stage III/IV cHL prevalence over a 10-year period was estimated; downstream lifetime productivity costs were projected without and with A+AVD. In 2031, 3,645 patients were estimated to be newly diagnosed with stage III/IV cHL. Over 10 years with 27% A+AVD vs no A+AVD use, estimates predicted 14% fewer deaths (2,290 vs 2,650) and 14% less total PVLE losses ($1.438 vs $1.664 billion). Results from scenario analyses (40%-80% vs no A+AVD use) showed 20% to 32% decreases in PVLE losses ($1.331-$1.137 billion vs $1.664 billion), saving up to $527 million over 10 years. Productivity cost losses due to mortality in stage III/IV cHL are high. Increasing A+AVD use for patients with stage III/IV cHL would reduce productivity cost losses as deaths are avoided, based on ECHELON-1 OS results.

Stakeholder Value: A Convenient Excuse for Underperforming Managers?

Abstract Firms falling short of earnings expectations are more likely to cite stakeholder-focused objectives in their public communications following earnings announcements. This behavior is consistent with managers preferring to be evaluated by subjective stakeholder-based performance criteria when falling short on objective shareholder-based measures. This increased use of stakeholder language is most evident among firms narrowly missing earnings estimates and appears unrelated to a firm’s actual environmental, social, and governance (ESG)-related activity. Stakeholder language appears to influence the evaluation of CEOs; turnover–performance sensitivity is lower for managers citing stakeholder value. Collectively, our findings are consistent with concerns that stakeholder objectives reduce managerial accountability for poor performance.

Corporate financial reporting and taxes: How important is prior performance?

Research Question: How do firms behave after significantly missing or exceeding analysts’ earnings estimates in terms of managing earnings and avoiding taxes? Motivation: Prior research provides strong evidence suggesting that managers are motivated to perform at or above analysts' expectations and steer earnings higher to prevent unpleasant earnings surprises. Prior studies have also documented that firms are likely to manage their earnings when they are close to meeting or missing analysts’ expectations. However, little is known about how firms behave after either substantially missing or beating analyst earnings estimates. Idea: This study provides evidence on firms’ earnings management and tax avoidance activities subsequent to the year in which firms substantially fail or succeed meeting analysts’ earnings consensus forecasts. Data: The data were collected from a sample of South Korean firms listed on the Korean Composite Stock Price Index for the years between 2013 and 2020. Tools: Multiple panel data regressions and robustness tests were conducted. Propensity score matching is also used to minimize endogeneity related problems. Findings: Firms are more likely to manage their earnings upward subsequent to significantly missing analysts’ expectations. However, their tendency to avoid taxes is lower. Contribution: Little has been explored on how firms significantly missing analysts’ expectations could behave in the subsequent period. The findings reported in this study have important implications for regulators, investors, and auditors. This research is also different from most prior related studies in terms of its setting.

A large-scale analysis of the heterogeneity of markets' reactions to the disclosure of nonfinancial information

ABSTRACT To allocate capital to its most sustainable use, market participants need information on companies' sustainability plans and initiatives. This information is disclosed in sustainability reports, but the disclosure process is largely unregulated and voluntary. When do sustainability reports convey relevant information? To answer this question we estimate the heterogeneous effects of nonfinancial disclosure on analysts' estimates of earnings and firms' equity values. We have found that the information content of nonfinancial disclosure is larger when firms are subject to greater information asymmetry, and when nonfinancial information is integrated within a financial context. Moreover, positive responses have a long-lasting impact while negative shocks are corrected within a short window. Overall, our work suggests that market participants' interest in standalone nonfinancial information is limited, and integrated reporting increases the value of sustainability reports.

Disparities on the Basis of Nationality, Ethnicity, and gender in Road Accident Compensation in Israel

AbstractThis study documents disparities on the basis of nationality, ethnicity, and gender in court awards regarding the loss of future earnings in road accident cases in Israel. We analyze a random selection of 236 court decisions in road accident cases that reached final decisions on their merits between 1978 and 2018 in which the nationality, ethnicity, and gender of victims were identifiable (via first and last names). We show that, although in Israel the reliance on sex- and race-based statistical data to calculate damages in tort cases is a prohibited practice, courts tend to reach lower estimates of future lost earnings for Mizrahi Jews, Arabs, and women than those of otherwise similarly situated Ashkenazi Jewish men. In the analyses, we hold injured persons’ earnings at the time of the accident and occupations constant. The effects we observe are significant in magnitude. The results of our study are particularly noteworthy given the fact that we document disparities that correspond with the already existing labor force inequalities and discrimination in hiring, salary, and promotion on the basis of nationality, ethnicity, and gender in Israel.

Recommending Career Transitions to Job Seekers Using Earnings Estimates, Skills Similarity, and Occupational Demand

Recommending Career Transitions to Job Seekers Using Earnings Estimates, Skills Similarity, and Occupational Demand

Mitigating the Influence of Analysts Who Issue Aggressive Stock Price Targets: The Role of Joint Versus Separate Evaluation*

ABSTRACTInvestors frequently rely on individual analysts' stock price targets. Aggressive price targets often reflect analysts' attempts to strategically influence investors. Therefore, investors' welfare may be compromised if they take aggressive price targets at face value. In this study, we examine conditions under which investors are more likely to infer that analysts who issue aggressive price targets are acting strategically. Investors can evaluate multiple analysts' price targets with or without other related information (e.g., earnings estimates). Investors can also evaluate the information provided by multiple analysts jointly or separately one analyst at a time. Two experiments find that as predicted, when investors evaluate multiple analysts' price targets without earnings estimates, there is no difference in investors' perceptions about whether the aggressive analyst is acting strategically across joint versus separate evaluation. However, also as predicted, when investors evaluate multiple analysts' price targets along with their earnings estimates, investors perceive the aggressive analyst as acting more strategically under joint evaluation than under separate evaluation. Our findings suggest that jointly evaluating multiple analysts' price targets with other related information, such as earnings estimates, can reduce the likelihood that investors would be overly influenced by aggressive analysts.

Income disclosure and consumer judgment in a multilevel marketing experiment

AbstractConsumer protection concerns have been raised related to income misrepresentation in multilevel marketing (MLM) recruitment. Though not required by law, some MLM firms choose to voluntarily disclose income information about previous participants. Through replication and extension of the experiment created in Bosley, Greenman, and Snyder (2020), we investigate the impact of these disclosures on consumer interest and earnings expectations. We test the external validity of their findings with subjects from Mechanical Turk and explore issues regarding treatment heterogeneity and better‐than‐average bias. Supporting prior findings, we present evidence that income disclosures, on average, do not significantly affect subjects' interest in the MLM opportunity, but they do decrease earnings estimates for most while increasing earnings estimates for a few. These effects depend on a subject's numeracy skills and whether they see their earnings potential as better‐than‐average. We also find that asking about earnings estimates first tends to decrease interest.

The impact of CSR performance and CSR disclosure readability on investors’ earnings estimates

AbstractWe investigate how the valence of corporate social responsibility (CSR) performance and the readability of CSR disclosure impact investors’ earnings estimates. Ninety‐seven part‐time MBA students participate in an experiment, in which we manipulate the valence of CSR performance (positive versus neutral) and the readability of CSR reports (high versus low), while holding financial information constant. Our findings reveal that investors make more positive earnings estimates when CSR performance is positive. The readability level of CSR reports also influences investors’ decision‐making process. Moreover, by using an eye‐tracking device, we are able to observe investors’ different reading behaviours upon the different levels of readability.

Modelling old‐age retirement: An adaptive multi‐outcome LAD‐lasso regression approach

AbstractUsing unique administrative register data, we investigate old‐age retirement under the statutory pension scheme in Finland. The analysis is based on multi‐outcome modelling of pensions and working lives together with a range of explanatory variables. An adaptive multi‐outcome LAD‐lasso regression method is applied to obtain estimates of earnings and socioeconomic factors affecting old‐age retirement and to decide which of these variables should be included in our model. The proposed statistical technique produces robust and less biased regression coefficient estimates in the context of skewed outcome distributions and an excess number of zeros in some of the explanatory variables. The results underline the importance of late life course earnings and employment to the final amount of pension and reveal differences in pension outcomes across socioeconomic groups. We conclude that adaptive LAD‐lasso regression is a promising statistical technique that could be usefully employed in studying various topics in the pension industry.

Beyond the male breadwinner: Life‐cycle living standards of intact and disrupted English working families, 1260–1850

AbstractThis article provides a novel framework within which to evaluate real household incomes of predominantly rural working families of various sizes and structures in England in the years 1260–1850. We reject ahistorical assumptions about complete reliance on men's wages and male breadwinning, moving closer to reality by including women and children's contributions to family incomes. Our empirical strategy benefits from recent estimates of men's annual earnings, so avoiding the need to gross up day rates using problematic assumptions about days worked, and from new data on women and children's wages and labour inputs. A family life‐cycle approach which accommodates consumption smoothing through saving adds further breadth and realism. Moreover, the analysis embraces two historically common but often overlooked family types alternative to the traditional male‐breadwinner model: one where the husband is missing having died or deserted, and one where the husband is present but unwilling or unable to find work. Our framework suggests living standards varied widely by family structure and dependency ratio. Incorporating detailed demographic data available for 1560 onward suggests that small and intact families enjoyed high and rising living standards after 1700, while large or disrupted families depended on child labour and poor relief until c. 1830. A broader perspective on family structures informs understanding of the chronology and nature of poverty and coping strategies.

Corporate Governance and Financial Fraud of Wirecard

This paper examines the antecedents and consequences of the collapse of Wirecard AG, in June 2020, the “German Enron.” Specifically, we investigate how the Wirecard’s ineffective corporate governance under the German’s financial regulatory system fails to serve their stakeholders, and how its management’s unethical behavior of earnings manipulation contribute to significant financial collapse for the company, and lead to the destruction of shareholders’ value. This paper examines how the internal and external governance and monitoring mechanisms failed to uncover the vast fraud at the German payments group at a much earlier stage. Furthermore, we find evidence consistent with the hypothesis that the continuous pressure of meeting or exceeding consensus on earnings estimates, management’s performance compensation based on the growth of Wirecard’s stock price, and the lack of proper supervision from the board of directors ultimately create the opportunities for management to manipulate earnings without being uncovered for several years. Such course of action has caused significant financial corporate misconduct for Wirecard and led to the destruction of firm value.

Analysts’ annual earnings forecasts and changes to the I/B/E/S database

I/B/E/S is a common source of analyst earnings forecast data, and the reliability of these data is important for practice and academic research. Examining a common sample period, we compare annual earnings forecasts across two versions of the I/B/E/S detail file, one made available in 2009 and the other made available in 2015. We find substantial differences in the contents of these two versions of the detail file as well as significant differences in the attributes of the earnings forecasts available in each version. Specifically, the earnings forecasts in the more recent version are more accurate and less biased, and they identify substantially different firms as meeting or just beating analysts’ expectations than those in the older version. To highlight the potential impact of these differences, we show that the economic magnitude of the effects of analyst experience and brokerage size on earnings forecast accuracy change by over 30% when we use the more recent version. Additional analyses suggest that the differences across versions of the detail file are ongoing. In contrast, we find that different versions of the summary file exhibit only minor differences over time. We also find significant differences in the properties of consensus earnings forecasts calculated from the individual earnings forecasts available in the detail file and consensus earnings estimates from the summary file. Finally, we provide guidance to researchers using I/B/E/S for analyst earnings forecast data.

Seemingly inconsistent analyst revisions

In about 20%–30% of cases where an analyst revises two outputs (namely, earnings estimates, target prices, or stock recommendations) simultaneously, the two estimates are revised in opposite directions. Existing literature notes that these inconsistent outputs are widespread, and concludes that they are lower-quality, driven by strategic bias, and are viewed as less valid by investors. We find that these characterizations are generally inaccurate. Apparent inconsistency is largely driven by accounting and economic factors, with only limited evidence that investment banking-related conflicts play a role. Moreover, inconsistent outputs are neither less accurate than consistent outputs nor do they resolve less investor uncertainty upon their release. Overall, our results suggest that researchers should be cautious in interpreting the correlation between analyst outputs as a measure of bias or quality, and in using a single analyst output as a proxy for an analyst's overall views.

Perceptions of inequality

Individual perceptions of (income or wealth) inequality have strong effects on their decisions as economic agents or voters. It is therefore important to know more about the relation between perceived and measured inequality. We present a novel formal framework that is based on the assumption that people typically do not observe the entire income (wealth) distribution and that their guesses about the extent of inequality are based on “self-centered” reference groups. This framework predicts that perceptions of inequality will change along positions in the income distribution and that for a specific position various dimensions of inequality perception are related to each other. First, low (high) income individuals overestimate (underestimate) their own position. Second, subjective estimates of average earnings increase with the own income position. Third, high or low income people have different perceptions about the skewness and the “shape” of the income distribution (e.g. pyramid or diamond). Fourth, the subjective perception of inequality is lower for high-income individuals. Survey data from 40 countries provide strong support for the framework.

Accrual income statements and present value models

PurposeThis paper demonstrates that present value (PV) models can be viewed as multiperiod extensions of accrual income statements (AISs). Failure to include AIS details in PV models may lead to inaccurate estimates of earnings and rates of return on assets and equity and inconsistent rankings of mutually exclusive investments. Finally, this paper points out that rankings based on assets and equity earnings and rates of return need not be consistent, requiring financial managers to consider carefully the questions they expect PV models to answer.Design/methodology/approachAISs are used to guide the construction of PV models. Numerical examples illustrate the results. Deductions from AIS definitions demonstrate the potential conflict between asset and equity earnings and rates of return.FindingsPV models can be viewed as multiperiod extensions of AISs. Mutually exclusive rankings based on assets and equity earnings and rates of return need not be consistent.Research limitations/implicationsPV models are sometimes constructed without the details included in AISs. The result of this simplified approach to PV model construction is that earnings and rates of return may be miscalculated and rankings based as asset and equity earnings and rates of return are inconsistent. Tax adjustments for asset and equity earnings may be miscalculated in applied models.Practical implicationsThis paper provides guidelines for properly constructing PV models consistent with AISs.Social implicationsPV models are especially important for small to medium size firms that characterize much of agricultural. Providing a model consistent with AIS construction principles should help financial managers view the linkage between building financial statements and investment analysis.Originality/valueThis is the first paper to develop the idea that the PV model can be viewed as a multiperiod extension of an AIS.