Earnings Estimates Research Articles

Earnings forecasts: the case for combining analysts\u2019 estimates with a cross-sectional model

We propose a novel method to forecast corporate earnings, which combines the accuracy of analysts’ forecasts with the unbiasedness of a cross-sectional model. We build on recent insights from the earnings forecasts literature to improve analysts’ forecasts in two ways: reducing their sluggishness with respect to information in recent stock price movements and improving their long-term performance. Our model outperforms the most popular methods from the literature in terms of forecast accuracy, bias, and earnings response coefficient. Furthermore, using our estimates in the implied cost of capital calculation leads to a substantially stronger correlation with realized returns compared to earnings estimates from extant cross-sectional models.

Döviz Kuru, Faiz Oranı ile BİST100 ve BİST Ulaştırma Endeksi Arasındaki İlişkinin Ampirik Analizi1 (Ampiric Analysis of Relationship Between Exchange Rate, Interest Rate and BIST100 and BIST Transportation Index)

Purpose – This study aims to reveal the relationship between exchange rate (US Dollar), interest rate (government bond interest rate) and Borsa Istanbul Transportation (XULAS) index and Borsa Istanbul 100 (BIST 100) indices. In addition, it is desired to test the degree of consistency between the results of the study and previous studies. Most importantly, there is no study done with the transportation index, and contributing to the literature is one of the other purposes of this study. Design/methodology/approach – In the study, although the period interval was wanted to be as wide as possible, daily data belonging to the variables between the dates 04.07.2006 - 31.12.2019 were used due to the criterion of accessing the data. In the study, the relationships between the variables were analyzed using the Toda-Yomamato (1995) causality test, where the symmetric causality relationship was examined, and the Hatemi J (2012) causality tests, where the asymmetric causality relationship was examined. Findings – According to the Toda-Yamamato (1995) causality test, it is determined that there is one-way causality relations from dollar exchange rate to Borsa Istanbul100 and Transportation index. According to the results of the asymmetric causality analysis, it was found that there was a bidirectional causality from all positive and negative shocks in the dollar exchange rate (1% and10%, mostly 1%) to the positive and negative shocks in the BIST100 index. However, according to the Hatemi-J asymmetric causality analysis, bidirectional causality was determined from the positive shocks experienced in the interest rate to the positive shocks occurring in the BIST100 index. Discussion – Requirements of the US dollar exchange rate variable in Turkey BIST100 index both BIST Transportation is also a significant impact on the index have been identified, businesses and investors are considered to be an important indicator of stock price and earnings estimates. The findings revealed in the analysis revealed that the dollar rate and the BIST Transport index can be accepted as an indicator, but changes in interest rates cannot be used as an indicator to predict the BIST Transport index.

Signaling via earnings downgrades: How reputational concerns shape analyst responses to corporate fraud?

AbstractResearch Question/IssueThis study examines reactions of financial analysts to the disclosure of corporate fraud. We posit that analysts downgrade earnings forecasts of fraudulent firms after fraud disclosure to signal their quality and integrity. We explore how internal and external contingencies shape analysts' reputational concerns, influence their motivation to signal via earnings downgrades, and consequently affect their responses to corporate fraud.Research Findings/InsightsUsing longitudinal data on Chinese publicly traded firms between 2002 and 2013 and employing a difference‐in‐differences design, this study documents that financial analysts significantly lower their earnings estimates of fraudulent firms after fraud disclosure compared with the control group of non‐fraudulent firms. In addition, post‐disclosure earnings downgrades are larger for more experienced analysts, for analysts following firms with stronger analyst coverage, and after the revision of the professional ethics code for analysts.Theoretical/Academic ImplicationsThis study provides empirical support to signaling theory. We show that earnings downgrades of fraudulent firms may serve as a signal for financial analysts to indicate their quality and integrity. We document that analysts' motivation to signal via earnings downgrades is influenced by their reputational concerns, which are moderated by their career experience, peer pressure, professional norm, and social expectations.Practitioner/Policy ImplicationsThis study offers insights to policy makers on how a professional labor market and codes of ethics could serve as disciplinary mechanisms to strengthen the external governance role of financial analysts.

Do Ownership Ties Increase the Optimistic Bias of Analysts’ Earnings Estimates? Evidence from Corporate Financing in the Korean Market

Previous studies argue that analysts provide optimistic estimates for corporations with which their brokerage houses have a business relationship. In this study, we investigate whether brokers with ownership ties issue optimistic estimates when their affiliates need support, as when raising debt or issuing equity. We find that Chaebol-owned brokerage houses provide optimistic earnings estimates for their affiliates relative to those provided by other brokers, especially before debt financing. However, we do not observe this relationship in the case of equity financing. These results imply that analysts with ties to corporations expect earnings management to occur around seasoned equity financing and, thus, consider the risks to their reputations. Finally, our results show that brokerage houses with ownership ties are not significantly more accurate than other brokerage houses are.

Signaling via Earnings Downgrades: How Reputational Concerns Shape Analyst Responses to Corporate Fraud?

This study examines reactions of financial analysts to the disclosure of corporate fraud. We posit that analysts downgrade earnings forecasts of fraud firms after fraud disclosure to signal their quality and integrity. We explore how internal and external contingencies shape analysts’ reputational concerns, influence their motivation to signal via earnings downgrades, and consequently affect their responses to corporate fraud. Using longitudinal data on Chinese publicly traded firms between 2002 and 2013 and employing a difference-in-differences design, this study documents that financial analysts significantly lower their earnings estimates of fraudulent firms after fraud disclosure compared to the control group of non-fraud firms. In addition, post-disclosure earnings downgrades are larger for more experienced analysts, for analysts following firms with stronger analyst coverage, and after the revision of the professional ethics code for analysts. This study provides empirical support to signaling theory. We show that earnings downgrades of fraudulent firms may serve as a signal for financial analysts to indicate their quality and integrity. We document that analysts’ motivation to signal via earnings downgrades is influenced by their reputational concerns, which are moderated by their career experience, peer pressure, professional norm and social expectations.

Does earnings surprise determine the timing of the earnings announcement? Evidence from earnings announcements of Indian companies

PurposeThe purpose of this study is to investigate whether the earnings surprise influences decision to make earnings announcements during or after the trading hours is influenced by the earnings surprise resulting from the difference between consensus earnings estimates and the actual reported earnings.Design/methodology/approachEvent study methodology was employed to test the hypotheses relating to earnings surprise and timing of earnings announcements. Twelve quarterly earnings announcements of 30 companies, drawn from BSE SENSEX of India, were studied to test the hypothesized relationships.FindingsThe study has found statistically significant differences in the market responses to the earnings announcements made during and after the trading hours. The market demonstrated a negative response to the earnings announcements made after the trading hours. Further, the results of the logistic regression have shown that the presence of significant earnings surprises is likely to induce firms to make earnings announcements after the trading hours. The results indicate that those firms that intend to reduce the overreaction and underreaction to earnings surprises are likely to make earnings announcements after the trading hours.Originality/valueThis paper highlights the market response to the earnings announcement made during and after the regular trading hour. Further, the paper examines if the earnings surprise influences the decision to announce the results.

Bearish Analysts and the Issuance of 'Unbeatable' Earnings Forecasts

We examine a sample of analysts who, despite having a bearish stock recommendation for a covered firm, issue an unusually optimistic earnings forecast at the end of the year. For the period 2004 through 2018, among analysts with an unfavorable stock recommendation, we find that about 5% issue a final earnings forecast prior to the earnings announcement that exceeds even the most optimistic earnings forecast issued by any other analyst covering the stock, presumably in an effort to increase the likelihood that the firm misses earnings expectations. More than 11% of all firm-year observations are subject to at least one such forecast at the hands of a bearish analyst. We find that analysts with pessimistic stock recommendations are more likely to issue these “difficult-to-beat” earnings forecasts when they have greater pressure to justify their negative view of the stock and when the earnings forecast has greater potential to revise investor beliefs. Nevertheless, stock returns associated with these optimistic forecast revisions are muted. We also find that although Thomson Reuters often excludes these forecasts from the consensus earnings estimate, the majority remain in the consensus and increase the likelihood that the firm misses the consensus forecast by about 21%. However, the market reaction to a negative earnings surprise is less severe when a bearish analyst has issued a difficult-to-beat forecast for the firm. Our study sheds light on one perverse strategy analysts use to increase the likelihood of an earnings miss.

The Character Skills of Immigrants

We use novel data on a representative sample of the U.S. population to examine how immigrants and second-generation immigrants compare to natives on non-cognitive character skills as measured by a common taxonomy of personality. Our findings reveal that immigrants and second-generation immigrants tend to have higher levels of openness to experience and agency than natives. Additionally, second-generation immigrants have higher levels of conscientiousness than natives. The findings are especially salient since character skills have been shown to influence labor market outcomes. Next, we examine the role of character skills differences on earnings by immigrant generation. Our earnings estimates reveal that non-cognitive skills have approximately as much explanatory power as schooling, yet non-cognitive skills have a modest impact on the earnings differences of immigrants and second-generation immigrants vis-a-vis natives.

Assessing the Costs of Screening for Ovarian Cancer in the United States: An Evolving Analysis.

The primary objective of this study is to provide an updated analysis of the cost of screening for ovarian cancer in the United States. Here, we use updated information from the University of Kentucky Ovarian Cancer Screening Trial in conjunction with new modifying factors such as U.S. national estimates of the cost of care (Truven Health MarketScan Database), recently published estimates of earnings lost due to ovarian cancer death and estimates of federal income taxes paid on those earnings. In total, 326,998 screens were performed during the Kentucky trial from 1987 to 2019. At a cost of $56 per screen, we estimate that the total base cost to operate the program over the last 32 years is $18,311,888. When accounting for the surgical cost of 381 false-positive cases, the total cost of the screening program increases by $3,030,474. However, these costs are offset by the benefit of treating more early-stage ovarian cancer in the screened population, with a total cost advantage of $4,016,475 at our institution (Kentucky) or $1,525,050 ($725,700–$3,312,650) (U.S.) nationally. Additionally, program costs are offset by approximately $3,549,000 due to the potential earnings gained by the 26 women whose lives have been saved with screening. Furthermore, the cost of the program is offset by the federal tax dollars paid on the recovered earnings and amounts to $383,292. Ultimately, the net adjusted total cost of the Kentucky screening program is an estimated $13,393,595 at our institution or $15,885,020 ($13,978,068–$16,799,083) nationally. Thus, the adjusted cost per screen is an estimated $40.96 in Kentucky or $48.58 ($42.75–$51.37) nationally.

The Graduate Wage and Earnings Premia and the Role of Non-Cognitive Skills

Estimates of the graduate earnings premium typically do not allow for the effect of non-cognitive skills. Since such skills are unobservable in most datasets there is a concern that existing estimates of the graduate premium are contaminated by selection on such unobservables. We use data on a young cohort of individuals that allows us to control for the effects of non-cognitive skills. We find that the inclusion of non-cognitive skills, themselves jointly significantly positive, reduces the estimated graduate premia by an insignificant 1-2 percentage points from an average of 10-12%. Our second contribution is motivated by the greater reliance on administrative datasets in recent research that has focused on annual earnings rather than hourly wages and our results show that the graduate earnings differential is significantly greater than the wage differential. Since we use estimation methods that are NOT robust to selection on unobservables, we adopt Oster (2016) tests to show that it would take an implausible degree of selection on unobservables to drive our estimated wage and earnings returns to zero, and that a plausible upper bound to returns is around one-quarter to one-third below the OLS returns. We further find heterogeneous returns by broad major group and elite university, and we find large degree class differentials.

Appraising Commercial Expenditure Efficiency of General Medical Education and Residency Programmes in Nigeria

Purpose: The purpose of the research is to establish the standard period taken in full recovery of cost outlays, rate of returns for general physicians and marginal returns to consultants, and appropriate profitability indices. Mixed ex-post “facto” data and primary data-sets pertaining medical education expenditure across levels and lifecycle career earnings of Nigerian physicians in public service were employed. The longitudinal secondary and primary data-set were obtained from cohorts of physicians that participated in the two stages of medical education, published programmes charges posted in brochures of some public universities’ medical schools and gazette consolidated medical salaries scheme of scale for medical workers in the public service. Method of Analysis: Break-even analysis was applied to determine minimum number of years required to fully invested capital; “elaborate (full cash flows) discounting” with internal rate of return method was used for calculation of the private and marginal rate of returns. Then, profitability ratio approach was applied to determine the level of viability of medical education across levels. Cost construction indicates that about N30 million and N69.5 million are committed as investments on general medical education and residency training of the licensed general physicians and consultant-physicians respectively. The lifecycle career earnings estimates of the general practice physicians and consultant-physicians employed in the public service worth N356 million and 814 million. Results: The break-even period for full recovery of investments in general practice physicians is 5.25 around the thirteenth years of medical education and 6.33 years for residency-trained consultants, occurring in the 21st period of this layer of vocational training respectively. Individual rate of returns on investments in general medical education of average licensed general physicians is 32 percent and 32 percent marginal rate of returns to additional investment expenditures on residency training (earnings premium of consultant-physicians). This combined rate of returns of consultant-doctors (general medicine plus residency training) is 64 percent. Net present value of cash-flows of the average general physician and consultant-doctors in Nigeria is worth N326 million and N744 million respectively. Whilst the profitability index derived from the present value of net cash-flows is 1.32 for general physicians and 1.69 for the specialist. Conclusion: The paper concludes that investments to medical education in Nigeria are worth-while; but more rewarding for residency training. Timing of education (age-range when doctors get certified) influences the earnings and rate returns to investments and value of one’s intellectual capital and net-worth (statistical financial value of life). Contribution to Knowledge: The results of assessment of individual’s expenditure efficiency in medical/higher education confirm that investment in medical education is worthwhile. The findings enhance rational decision for individuals, private sector and government organizations respectively and veritable information for policy formulation. Originality: This research is an exploratory assessment of individual participants’ spending efficiency in medical education in Nigeria and other developing country establishes tentative pay-back period of such investments, unit rates of returns across levels and profitability indices.

Do current‐year forecasts deserve investors' exclusive attention among analyst estimates?

AbstractThis study demonstrates that in using security forecasts for equity valuation, it would be preferable to take into consideration of analyst multi‐year forecasts instead of exclusively employing current‐year earnings forecast because the latter forecast measure most typically incorporates non‐recurring and/or value‐irrelevant components of accounting earnings. In contrast, the same analyst's concurrent long‐term earnings estimates appear to be free from the influence of the non‐recurring earnings items. Namely, when a firm's long‐run profitability differs from current year earnings, long‐horizoned analyst forecasts add to identify the differences.

Is LEO ‘Orwellian'? Earnings, Willetts, OfS, Creative Arts, and the Cost of Higher Education

AbstractThe cost of higher education to the taxpayer is determined in part by the choice of subject and institution made by students. The Augar report on higher education noted that there was an oversupply of ‘low value' courses and called on the government to ‘bear down on low value courses' and ‘target courses better aligned with the economy's needs'.1 Until recently there was no reliable data to identify such courses or the institutions supplying them. The Institute for Fiscal Studies has utilised recently available longitudinal education data on earnings, courses and institutions to rectify this deficiency. Many of the lowest earning courses are in the creative arts. Not everyone is happy with using earnings to measure the value of courses. This paper discusses the IFS estimates of graduate earnings and the public cost of higher education, as well as the criticisms of using earnings data to measure the value of courses and institutions.

Preliminary Earnings Estimate and Dividends Payout Ratio: A Comparison Study on High-Tech vs. Low-Tech Industries

본 연구는 2012년부터 2017년까지 국내 상장기업들을 대상으로 첨단산업군 기업(이하 첨단기업)들과 비첨단산업군 기업(이하 일반기업)들을 구분하여 기업의 배당성향을 비교 분석하였다. 아울러 첨단기업들이 사전공시한 잠정이익과 회계감사 이후 확정되는 확정이익의 차이인 잠정이익공시오차에 따라 기업의 배당성향이 어떻게 다른지 실증 분석하였다. 분석결과, 일반기업들은 잠정이익을 확정이익보다 과대하게 공시하고, 첨단기업들은 오히려 축소하여 공시하는 경향이 있는 것으로 나타났다. 이는 첨단기업들이 잠정이익을 과대공시하여 확정이익이 잠정이익에 미달하는 경우, 부정적 어닝 서프라이즈(negative earnings surprise)에 상대적으로 더 큰 부담을 갖는다는 것을 시사한다. 첨단기업은 일반기업보다 투자에 대한 욕구가 강하고 외부자금 조달비용이 많이 들어서 될 수 있으면 현금배당을 줄여 초과현금을 사내에 보유하려는 경향이 있다는 사실도 확인할 수 있었다. 첨단기업의 잠정이익공시오차와 배당성향의 인과관계를 분석한 결과, 기업이 잠정이익을 과소하게 공시할수록 현금배당금이 감소하는 것으로 나타났다. 이는 새로운 투자수요가 상대적으로 큰 첨단기업들이 사전에 잠정이익을 보수적으로 공시하면서 주주들의 배당에 대한 기대심리를 낮추어 현금배당을 적게 하려는 의사결정으로 판단된다. 본 연구는 일반기업의 잠정이익 과대공시 경향에 대한 기존연구들의 관점에서 벗어나 첨단기업의 배당성향과 잠정이익 과소공시 수준의 인과관계를 규명하였다.This paper examines firms’ dividends payout ratios and preliminary earnings in high and low-technology industries. Furthermore, this paper studies how errors in preliminary earnings of high-tech companies, which is a difference between the finalized actual earnings and preliminary earnings estimate, affect their dividend payout ratios. From the study of Korean public companies between 2012 and 2017, it is revealed that high-tech firms tend to understate their preliminary earnings while low-tech firms tend to report higher preliminary earnings than their actual earnings. The implication is that, compared to low-tech corporations, high-tech firms are more vulnerable to negative earnings surprises due to overly optimistic preliminary earnings disclosure. Moreover, because high-tech firms are more likely to have greater investment opportunities and to incur increased external funding costs, they are thereby incentivized to maintain more cash within the company. They achieve this by decreasing their cash dividends to lower market expectations based on conservative preliminary earnings announcements. On the basis of empirical tests, this paper presents the amount of cash dividends decreases as firms understate their preliminary earnings.

Differential Odds of Employment and Estimation of Earnings Among Those With Spinal Cord Injury

Our purpose was to identify demographic, educational, and injury-related characteristics associated with odds of employment and estimates of differential earnings among participants with spinal cord injury (SCI). Self-report assessments were obtained from 1,983 participants who had traumatic SCI, were 18+ years old, and less than 65 years of age. All were recruited into the current cross-sectional study from previous studies of health and aging from the Midwestern and Southeastern United States. Midwestern participants had 2.41 higher odds of employment. Older age at injury was associated with lower odds of employment. There were no sex differences in the odds of employment, but women had an estimated US$19,431 lower conditional earnings. Non-Hispanic Blacks had 69% lower odds of employment, and those working had an estimated US$12,058 lower earnings. Ambulatory participants had higher odds of employment (odds ratio [OR] = 4.66) and higher conditional earnings (US$17,277) than those with the most severe SCI. Those with 4-year or postgraduate degrees had substantially higher odds of employment (OR = 4.15, OR = 5.72, respectively) and higher conditional earnings (US$29,990, US$44,580, respectively) compared with those with a high school certificate or less. These findings underscore the importance of policies to promote the optimal quality employment outcomes for people with SCI.

Intergenerational Earnings Inequality: New Evidence From Italy

Using an innovative dataset built by merging survey and administrative data, we provide new estimates of intergenerational earnings’ inequality between fathers and sons in Italy, extending previous evidence in several directions. We rely on the TSTSLS method to predict fathers’ earnings and compute intergenerational elasticities and imputed rank–rank slopes, trying to reduce estimation biases. Confirming previous evidence, we find that Italy is characterized by a high intergenerational inequality in cross‐country comparison. Extending previous analyses, we show that the intergenerational association increases when sons at older ages and multi‐annual averages of pseudo‐fathers’ and sons’ earnings are considered. We also find that the intergenerational persistence differs across geographical macro‐areas and is high also for daughters, especially when family earnings are considered. Furthermore, estimates where possible mediating factors of the parental influence are included among the covariates show that a high intergenerational association persists when sons’ education and occupation are controlled for.

Spinning their wheels: a reply to Jane Humphries and Benjamin Schneider

AbstractJane Humphries and Benjamin Schneider have assembled several large databases of spinners’ production and wages that they believe disprove my view that high wages led to mechanization in eighteenth‐century England. This reply examines their data and shows that they have little value for understanding the incentives to mechanize. In addition, I present new evidence that substantiates my earlier estimates of productivity and earnings. The high wage hypothesis is unimpaired by the critique of Humphries and Schneider.

Adoption of performance-vested equity incentives under investor pressure: window dressing or taking the window of opportunity?

Companies are increasingly adopting performance-vested equity compensation plans while the performance consequences are not clear. In this paper, we investigate whether firms are window dressing or taking the window of opportunity to adopt these plans when institutional investor pressure is present. We find that firms being targeted by shareholder proposals have higher cumulative abnormal returns during 3 days around the proposal filing date. Subsequent examinations suggest that target firms are more likely to adopt performance-vested stock or stock options within 2 years after being targeted. And the long-term stock return and operating performance of the target firms are significantly higher than control firms. However, additional analysis indicates that target firms are more likely to meet and beat financial analysts’ earnings estimates, and that such phenomenon may be motivated by earnings management. Collectively, our evidence is consistent with both the hypothesis of window dressing and the hypothesis of taking the window of opportunity.

Gender, Learning, and Overconfidence: Why Females Create More Accurate Earnings Estimates

We analyze the underlying source of gender differences in earnings estimates on a crowd-sourcing platform with low barriers to entry. This platform allows us to examine gender differences within earnings estimates among a sample of non-professional analysts in an effort to better understand the development of analyst ability. Estimates made by females are more accurate than those made by males. We eliminate explanations of more talented females joining the platform, an innate ability of females to process information, females utilizing more up-to-date information, superior stock selection among females, and survivor ship bias. Rather, our evidence is consistent with females learning faster and males exhibiting greater overconfidence. Our findings provide new insight into the mechanisms behind the increase in accuracy documented among professional female analysts. Finally, we observe a positive market response when females provide more optimistic estimates.

Convergence consensus analyst earnings estimates and option pricing in modeling material accounting misstatements

PurposeThe purpose of this paper is to introduce analyst estimates and option pricing-based variables in modeling material accounting misstatements.Design/methodology/approachThe paper uses a logistic regression model to analyze a comprehensive sample of AAER and non-AAER firms listed in the USA.FindingsBy applying a cross-sectional, sequence of time-series logistic regression models, the authors find better identifiers of ex ante risk of fraud than prediction models based on an inspection of abnormal accruals. These identifiers include the managed earnings (ME) component of a firm and the change in a firm’s option contracts’ implied volatility (IV) prior to an earnings announcement.Practical implicationsThe empirical findings contribute to an understanding of earnings manipulation (fraud) and should be of value to auditors and regulatory bodies interested in identifying financial statement fraud, particularly the Securities and Exchange Commission, which has been improving its accounting quality model (AQM or Robocop) fraud detection tool for many years. The results contribute substantially to enhancing the current accounting literature by introducing two non-accrual-based measures that significantly enhance the predictive power of an accrual-based accounting misstatement prediction model.Originality/valueThis paper radically departs from relying on the assumption that the clearest and easiest pathway to detect fraud reporting ex ante is through an examination of accruals. Instead, the authors use a richer source of information about the possibility of a firm’s misstatement of its financial accounting numbers, namely, analyst estimates of ex post earnings and the IV from exchange-traded option contracts.