Earnings Estimates Research Articles

The growth of aggregate wage earnings in Germany, 1810–1989

Aggregate wage earnings are one of the key variables of the German economy. Paradoxically, it is also a little known variable, especially in the long term. Historians have never devoted a synthesis to the subject and, among all the economists who have centred their work on the study of economic growth, Hoffmann (1965) is the only one to have addressed aggregate earnings over a long period. This article follows up his founding work and has two objectives. The first is to measure the movement of wages and wage earners over a long period and use this to make an original estimate of aggregate employment earnings in Germany from 1810 to 1989. Reconstituted sets of statistics are also used to put forward new hypotheses concerning the way is which wages, wage earners and aggregate employment earnings in Germany are linked to the socioeconomic development of the country in the 19th and 20th centuries. It is also sought to detect the temporary and permanent shocks that have affected the German economy since the beginning of the 19th century. Our reflection is in two parts. The first defines the concept of wages, sets out the spatial scope and describes the methodological constraints. The second describes our cliometric results.

Non-Financial Performance Indicators (R&D) Impact on Individual Investors’ Decision Making

Special committee of the AICPA on financial reports has urged disclosure of related non-financial performance measurers and forward-looking information to addition customary financial reports (AICPA, 2002). This study shows an experiment that examines whether additional disclosure of non-financial performance measurement (R&D) impact on individual Investors’ net earnings estimates. An experiment was directed applying investors who were prepared with a hypothetical firm’s annual report. The experiment presented to include two levels (additional disclosure positive non-financial performance (R&D), negative non-financial performance (R&D) 1 (financial statements only as control group) between-subjects design. The individual investors with high education and knowledge reacted to the negative and positive information, as anticipated from the prior research. The results show that the value of positive additional disclosure of non-financial performance (R&D) may not overflow in an equal manner to all users of financial statements. It also indicates that regulatory intervention to additional disclosure to all investors may not have the desired effect if cognitive biases, and lack of task-specific knowledge, adversely affect their decision-making.I provided in advance proof on disclosures that can help individual investors. When my experiment sets convergent proof of the impact of these disclosures in a controlled setting, in addition, it prepares fresh proof that the differences in investors’ appraisals are probably involuntary, caused by reminder bound. This study found that additional disclosures non-financial performance (R&D) improve individual investors decision making, although these disclosures are superfluous with data in the initial financial reports.

Information Technology and Firm Boundaries: Impact on Firm Risk and Return Performance

In this paper, we empirically investigate the impact of information technology (IT) investment on firm return and risk financial performance, emphasizing the moderating role of the firm boundary strategies of diversification and vertical integration. Our results indicate a sharp contrast between the direct and interactive effects of IT on both the return (profitability) and risk (variability of returns) dimensions. Although the direct effect of IT capital is to increase firm risk for a given level of return, we find that suitable boundary strategies can moderate the impact of IT on firm performance in a way that increases return and decreases risk, at the margin. This interaction effect is strongest in service firms, in firms with high levels of IT investment intensity, and in more recent time periods. Our results are robust to alternative proxies for firm risk, including an ex ante risk measure (variability of analysts' earnings estimates), and alternative risk-return specifications. Put together, our results provide new insights into how IT and firm boundary strategies interact to affect the risk and return performance of firms.

The Informativeness Of Cash Flow Forecasts And The Regulation FD Environment

Prior literature shows that analysts forecast estimates serve as a proxy for the markets and investors beliefs which are unobservable. For decades, analysts have generated forecasts for use in valuation models including future estimates of earnings and growth. Yet, only recently, analysts have begun to voluntarily provide cash flow per share forecasts at the same time they are producing earnings per share forecasts for firms they follow. This study addresses whether the tendency of analysts to issue cash flow per share forecasts, as a result of changes in the regulatory environment, affects forecast properties. By examining the time frame surrounding Regulation FD, the analysis provides evidence that both the mere existence and the relative measure of analysts cash flow per share forecasts differ in explaining analysts earnings forecast accuracy. Specifically, the empirical results demonstrate that the relative value of analysts cash flow forecasts, the implied value of unexpected accruals, and cash flow forecast errors facilitate the reduction in analysts earnings forecast errors subsequent to the passage of Regulation FD. Further, the inverse relation between these analysts inputs and earnings forecast errors appear to be driven by firms with more accurate cash flow forecasts.

Are Multiple Analyst Earnings Forecasts Better Than the Single Forecast?

This study investigates the impact of multiple information sources. Specifically, we examine whether single and multiple earnings forecasts may differentially influence investors’ expectations. We focus on two main aspects of investors’ expectations: (a) predictions of future EPS and (b) subjective confidence about their own predictions. We conduct an experiment where we hold information content constant and ask participants to evaluate multiple earnings forecasts or a single earnings estimate. Results from the experiment suggest that multiple information sources improve participants’ confidence, and participants are most confident when they receive multiple earnings forecasts with no variability. However, their confidence diminishes when variability in the multiple forecasts increases. Evidence from this study indicates that multiple information sources outperform the single source only when multiple reports have highly consistent information.

Dynamic Growth Equity Returns

Within book/market quintiles, expected return from constant growth equity valuation (static growth expected return, SGER) relates positively with realized returns. However, SGER overstates realized returns for growth stocks and understates realized returns for value stocks. We investigate whether reversion in ROE, which is a SGER input, reconciles these biases. We compare several ROE forecasts using both historical and analysts’ earnings estimates but SGER continues to overstate (understate) returns for growth (value) stocks. On the other hand, the regression of return on ROE for value versus growth stocks is a conditional reduced-form version of a dynamic equity valuation model that recognizes the value-premium. We call return forecasts from these regressions dynamic growth expected returns, DGER, which in large part eliminate the value-versus-growth bias.

Rational Prediction Of Future Pension Expense: A Simulation Approach

<p class="MsoBodyText" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt; mso-bidi-font-style: italic;"><span style="font-family: Times New Roman;">Because future pension expense can have a material influence on a firm’s future earnings, financial analysts are faced with the difficult task of forecasting its impact.<span style="mso-spacerun: yes;">  </span>The purpose of this paper is to demonstrate a model that can be used with a simulation approach to predict future pension expense and its associated uncertainties.<span style="mso-spacerun: yes;">  </span>Because of the importance and complexity of the pension expense component in the estimate of future earnings, a simulation model acts as a powerful analytical tool that can give the analyst greater confidence as to the magnitude and variability of future pension expense.</span></span></p>

Environmental Externalities and Cost of Capital

I analyze the impact of a firm's environmental profile on its cost of equity and debt capital. Using implied cost of capital derived from analysts' earnings estimates, I find that investors demand significantly higher expected returns on stocks excluded by environmental screens (such as hazardous chemical, substantial emissions and climate change concerns) compared to firms without such environmental concerns. Lenders also charge a significantly higher interest rate on the bank loans issued to firms with these environmental concerns. I provide evidence that environmental profile of a firm is not simply proxying for an omitted component of its default risk. Further, firms with these environmental concerns have lower institutional ownership and fewer banks participate in their loan syndicate than firms without such environmental concerns. These results suggest that exclusionary socially responsible investing and environmentally sensitive lending and the consequent increase in the cost of equity and debt capital has the potential to prompt firms to internalize their environmental externalities.

Management Insights

Management Insights

Analyst's earnings estimates for publicly traded food companies: How good are they?

Professional analysts' estimates of earnings per share (EPS) provide a rare source of forward-looking information regarding the financial performance of publicly traded firms. Although numerous studies in the economics, finance, and accounting literatures have examined the properties of these forecasts and provided general insight into their performance, no known research explicitly examines the performance of analysts' EPS estimates for publicly traded food companies. This issue is particularly relevant given the influence that publicly traded agribusiness companies maintain in the agro-food supply chain (Vickner, 2002). Focusing on quarterly consensus estimates of EPS for 11 of the largest publicly traded food companies based on capitalization, the authors examine the point accuracy of these estimates through the introduction of the mean absolute scaled error measure, their performance over time, as well as their optimal forecast properties of bias, efficiency, and forecast encompassing. Results suggest that professional analysts, on average, produce EPS estimates that are more accurate than time series alternatives, yet the differences are often not statistically significant. For many of the firms examined, analysts' EPS estimates are found to be biased, inefficient, and do not encompass information in simple time series alternatives. For many firms in the sample, forecast accuracy has decreased over time. However, it is difficult to determine if this decline in forecast accuracy is due to turnover of analysts in the wake of increased financial market regulation (e.g., Sarbanes-Oxley), decline in forecasting skill, or structural changes in the food industry, which make it more difficult to forecast earnings over time. [EconLit citations: Q140; G170; M490]. © 2010 Wiley Periodicals, Inc.

How Informative is Management Earnings Guidance Relative to that of Analysts?

Market participants rely on earnings estimates for a variety of financial decision making purposes. Management and analysts represent two important sources of such estimates. Relying on a sample where management and analysts forecast for the same firm on the same day, we find that the management guidance is less informative to the market (i.e., has a weaker covariation with the price response) than that of the analyst. Additional analyses reveal that the value in analysts’ forecasts stems from their relatively greater accuracy and objectivity.

Comparison of the guaranteed estimates of innovation effectiveness

A new multipurpose technical system designed under the uncertain conditions was compared in terms of the guaranteed estimate of earnings with the functioning system and the ideal system, which hypothetically could have been constructed in the presence of precise a priori information about all--in reality, uncertain, uncontrollable--factors. The guaranteed estimate-based comparisons were corroborated by the experiments with a conventional example under various, not only critical, variants of the a priori uncertain factors.

When Are Analyst Recommendation Changes Influential?

Not all stock recommendation changes are equal. In a sample constructed to minimize the impact of confounding news, relatively few analyst recommendation changes are influential in the sense that they impact investors’ beliefs about a firm in a way that could be noticed in that firm’s stock returns. More than one-third of the stock-price reactions to analyst recommendation changes have the wrong sign and only approximately 10% have significant stock-price reactions at the 5% level using an extended market model. We find that the probability of an influential recommendation is higher for leader analysts, star analysts, away-from-consensus revisions, revisions issued contemporaneously with earnings forecasts, analysts with greater relative experience, and those with more accurate earnings estimates. Growth firms, small firms, high institutional ownership firms, and high prior turnover firms are also more likely to have influential stock recommendations. Strikingly, analyst recommendations are more likely to be influential after Reg FD and the settlement. Finally, influential recommendations are associated with increases in stock volatility and large absolute changes in consensus earnings forecasts.

Environmental Externalities and Cost of Capital

Ianalyze the impact of a firm's environmental profile on its cost of equity and debt capital. Using implied cost of capital derived from analysts' earnings estimates, I find that investors demand significantly higher expected returns on stocks excluded by environmental screens (such as hazardous chemical, substantial emissions, and climate change concerns) compared to firms without such environmental concerns. Lenders also charge a significantly higher interest rate on the bank loans issued to firms with these environmental concerns. I provide evidence that the environmental profile of a firm is not simply proxying for an omitted component of its default risk. Further, firms with these environmental concerns have lower institutional ownership and fewer banks participate in their loan syndicate than firms without such environmental concerns. These results suggest that exclusionary socially responsible investing and environmentally sensitive lending can have a material impact on the cost of equity and debt capital of affected firms. This paper was accepted by Brad Barber, finance.

Underwriting Relationships and Analyst Independence in Europe

This paper examines the accuracy of security analysts’ earnings forecasts and stock recommendations for firms in 13 European countries. We document at least three key findings. First, we find strong evidence that lead and co‐lead underwriter analysts’ earnings estimates and stock recommendations are significantly more optimistic than those provided by unaffiliated analysts. Second, we find that lead and co‐lead underwriter analysts’ earnings forecast and stock recommendations are significantly more optimistic for underwriter stocks than for those they provide for other stocks. Third, we also find evidence that these biases found within earnings forecasts and stock recommendations are not driven by one particular country. In short, these findings suggest that affiliated analysts are more optimistic perhaps to maintain investment banking relations.

Reporting Bias and Economic Shocks

We propose a parsimonious stochastic model of reported earnings that links misreporting to performance shocks. Our main analytical prediction is that misreporting leads to a negative second-order autocorrelation in the residuals from a regression of current earnings on lagged earnings. We also propose a stylized dynamic model of earnings manipulation and demonstrate that both earnings smoothing and target-beating considerations result in the same predictions of negative second-order autocorrelations. Empirically, we find that the distribution of this measure is asymmetric around zero with 27 percent of the firms having significantly negative estimates. Using this measure, we specify a methodology to estimate the intensity of misreporting and to create estimates of unmanipulated earnings. Our estimates of unmanipulated earnings are more correlated with contemporaneous returns and have higher volatility than reported earnings. With respect to economic magnitude, we find that, in absolute terms, median misreporting is 0.7 percent of total assets. Moreover, firms in our sample subject to SEC AAERs have significantly higher estimates of manipulation intensity.

The Impact of Introducing Estimates of the Future on International Comparability in Earnings Expectations

The objective of this paper is to assess whether the inclusion of improved estimates of the future in corporate annual financial statements has brought about greater international comparability. It is argued that including more relevant information in financial reporting enables users to estimate earnings that are more able to reflect current economic conditions and up-to-date expectations of the future and thus recognize news in a more timely manner. To reflect the underlying economics of integrating financial markets, earnings expectations must be not only more timely but also more comparable. Thus, in examining the increasingly widespread adoption of International Financial Reporting Standards (IFRS), this study considers both the timeliness and the comparability of earnings expectations in the European Union, before and after the mandatory IFRS implementation. The empirical findings support the view that users' earnings estimates have indeed become more timely in recognizing market news and significantly more comparable.

Socially Responsible Investing and Expected Stock Returns

Using implied cost of capital derived from analysts' earnings estimates, I find that investors demand significantly higher expected returns on stocks excluded by environmental screens (such as hazardous chemical, substantial emissions and climate change concerns) widely used by socially responsible investors as compared to firms without these environmental concerns. I also document that firms with these environmental concerns have lower institutional ownership and are held by fewer institutional investors than firms without similar environmental concerns. These results suggest that exclusionary socially responsible investing and the consequent increase in the cost of capital is one channel through which environmental externalities can be internalized by the firm.

What Drives the Value of Analysts' Recommendations: Earnings Estimates or Discount Rate Estimates?

An analyst changes his recommendation of a stock to indicate to investors that his valuation of the stock differs from the market's valuation. Explicitly or implicitly, the difference in valuation ultimately arises from disagreement about earnings estimates and/or discount rate estimates. We argue that recommendation changes that are based on changes in earnings estimates are characterized by harder information, greater verifiability, and shorter forecast horizons than recommendation changes that are based on discount rate estimates, so they are less subject to analysts' cognitive and incentive biases. Therefore, earnings-based recommendation changes should be more informative to investors than discount rate-based recommendation changes. We find that both the initial price reaction and the drift after recommendation changes are 50%-200% bigger for earnings-based recommendation changes than for discount rate-based recommendation changes. Trading on earnings-based recommendation changes earns average risk-adjusted returns of over 3% per month over the period 1994-2007.

Analysts Get SAD Too: The Effect of Seasonal Affective Disorder on Stock Analysts' Earnings Estimates

Previous research finds that stock analysts exhibit both optimistic and pessimistic biases in their earnings forecasts, with the net result being a consistent but declining overestimation of forecasted earnings. We extend this research by examining the potential effect of seasonal affective disorder (SAD), a documented psychological condition that produces heightened pessimism and risk aversion during the fall and winter months, on stock analysts' earnings estimates. Our results suggest that analysts are generally optimistic in their forecasts but significantly less so during SAD months. We also find this relation to be most pronounced for analysts located in northern states, who should be the ones most impacted by the disorder. We conclude that while the effect of SAD appears to be present, it actually seems to overcome an existing positive bent in earnings forecasts, thereby making estimates more accurate. Our findings add to the existing literature by identifying an additional psychological bias that could potentially influence stock analysts' earnings estimates.