Properties Of Earnings Forecasts Research Articles

Accounting estimation intensity, analyst following, and earnings forecast properties

We specify two measures of accounting estimation intensity (AEI) based on the textual analysis of the qualitative disclosures in the critical accounting policies (CAP) section of firms' MD&A. We then examine how these measures relate to financial analyst following and earnings forecast properties. Using a narrow dictionary definition of accounting estimates, we find AEI is positively associated with analyst following. It is also associated with increasing levels of private information in analysts' forecasts and the informativeness of analysts' reports when analysts engage in greater scrutiny of accounting estimates. Using a broader definition of accounting estimates yields a statistically significant relation with the informativeness of analysts' reports. Overall, our results are consistent with AEI stimulating investor demand for analysts' services and increasing the informativeness of these services.

Executive Extraversion and Voluntary Disclosure: Evidence from Management Earnings Forecasts

This study examines whether and how the extraversion of a firm’s key executives influences its provision and the properties of management earnings forecasts. We provide evidence that firms with extraverted chief financial officers (CFOs) are more likely to have a greater level of voluntary disclosure. Specifically, we find that firms with extraverted CFOs tend to issue more earnings forecasts, forecasts with greater level of disaggregation, and forecasts accompanied by an internal attribution. However, we also find that the earnings forecasts issued by extraverted CFOs tend to be less timely and exhibit larger forecast errors. In contrast, we find no evidence that the extraversion of chief executive officers (CEOs) plays a significant role in either the provision or the properties of earnings forecasts. Further analysis suggests that after controlling for earnings forecast surprises, investors tend to react more strongly to earnings forecasts issued by extraverted CFOs. Collectively, our results suggest that the higher level of earnings forecasts associated with CFO extraversion is likely to result from the personality of the CFOs.

Analyst Reaction to Nonarticulation Between the Statement of Cash Flows and the Balance Sheet

We investigate the effect of non-articulation on analyst earnings forecast quality. We look for evidence on the relationship between non-articulation and analyst earnings forecast properties: forecast inaccuracy, forecast dispersion, and forecast bias. As we would expect that non-articulation obscures accounting information available to analysts, we posit that non-articulation increases forecast inaccuracy and forecast dispersion.

Analyst reaction to non-articulation between the balance sheet and the statement of cash flows

Purpose The purpose of this paper is to investigate the effect of non-articulation on analyst earnings forecast quality. The authors look for evidence on the relationship between non-articulation and analyst earnings forecast properties: forecast inaccuracy, forecast dispersion and forecast bias. Design/methodology/approach The empirical tests are primarily based analyst earnings and cash flow forecasts covered by Institutional Broker Estimate System and financial statement information obtained from Compustat North America database. Findings The authors hypothesize and find that non-articulation is positively related to analyst forecast dispersion, forecast accuracy and forecast bias for one-year ahead of earnings. The effects of non-articulation on analyst earnings forecast inaccuracy and bias are neutralized when the analyst issues a cash flow forecast and when such forecast provides accurate information regarding the forecasted firm’s operating cash flow. On the other hand, cash flow forecast issuance alone does not mitigate the negative influence of non-articulation. Research limitations/implications The sample selection procedure limits the generalizability of the findings. Practical implications The findings confirm CFA Institute and prior research asserting that non-articulation deteriorates the quality of earnings forecasts by financial statement users (more specifically, the financial analysts). The authors add to the literature by documenting that accurate cash flow forecasts help analysts mitigate the negative influence of non-articulation on earnings forecast quality. Originality/value It remains an empirical question whether non-articulation between the balance sheet and the statement of cash flows has an effect on financial statement users’ ability to assimilate financial information. The paper highlights the detrimental effect of non-articulation by documenting the relationship between the non-articulation and the quality of earnings expectation.

Has Sarbanes-Oxley standardized audit quality?

PurposeThe purpose of this paper is to examine whether the institutional changes accompanying the passage of the Sarbanes-Oxley Act of 2002 (SOX) have standardized the audit’s role in the overall financial reporting process, thereby reducing the impact of auditor characteristics on financial reporting quality.Design/methodology/approachTo test this hypothesis, the association between audit quality characteristics (auditor size and industry expertise) and measures of financial reporting quality (analyst earning forecast dispersion and accuracy) are estimated using regression analysis. Results of this analysis are compared across the pre- and post-SOX periods.FindingsThe results of the study document a significant relationship between auditor size (Big N vs non-Big N) and financial reporting quality (as proxied by analyst earnings forecast properties) during the pre-SOX period but not in the post-SOX period. Auditor industry expertise is significantly associated with financial reporting quality throughout the entire sample period. Thus, financial reporting quality continues to be dependent on the degree of specialization of an audit firm in both the pre- and post-SOX periods; however, the impact of auditor size as a surrogate for quality has diminished.Originality/valueThe SOX Act of 2002 represented one of the most significant changes in the regulation of audits. This paper adds to the literature by examining the Act’s effects on financial professionals’ perception of the impact of audit firm characteristics on their client’s financial reporting quality.

The Influence of Institutional Investors on Analyst Earnings Forecast Properties

Analysts are motivated to fulfill client demand for information, and institutional investors are sell-side analysts’ most important clients. Following time allocation theory, analysts likely prioritize tasks and the firms they follow to maximize their overall utility. I posit analysts issue more accurate and informative earnings forecasts for firms that provide greater expected utility to the analyst. Using the firm’s exposure to institutional investors, as a measure of expected utility, I find that analysts report more accurate forecasts for firms with greater exposure to institutional investors. In addition, I find evidence that analysts issue more informative earnings forecasts for firms with greater exposure to institutions that rely on private information, specifically institutions with transient investment strategies. These findings suggest that analysts allocate greater forecasting resources to firms with more exposure to priority clients and issue more informative and accurate forecasts for these firms.

Real Earnings Management and the Properties of Analystss Forecasts

We examine how analysts’ earnings forecast properties vary when accounting information is more difficult to process. Specifically, we investigate whether analysts’ forecast properties are associated with traditional real earnings management (REM) measures. We hypothesize and find that analysts’ forecast errors and dispersion are greater for REM firms. Next, we investigate cross-sectional differences among REM firms based on the presence of management guidance. We find some evidence that management guidance reduces the association between REM and analysts’ forecast error, and strong evidence that management guidance reduces the association between REM and dispersion. Finally, we investigate cross-sectional differences among REM firms based on their earnings management incentives. We find that firms with low earnings management incentives drive the association between REM and analysts’ forecast error and dispersion. This result suggests earnings are most difficult to forecast for REM firms lacking obvious financial reporting objectives. Our results are consistent across numerous proxies for REM. To the best of our knowledge, our paper is the first to provide robust evidence of a relation between REM and the properties of analysts’ forecasts.

Auditorss Response to Analystss Forecast Properties: Some Evidence from Audit Pricing

This study draws on information asymmetry theory and audit pricing theory to examine the linkage between analysts’ earnings forecast properties and audit pricing in the US. To test these associations information asymmetry is measured by (1) analysts’ forecast accuracy, and (2) analysts’ forecast dispersion. This study provides evidence that higher analyst earnings forecast accuracy (dispersion) are associated with lower (higher) audit fee pricing. Our interpretation of these results are that analysts, as important financial intermediaries, provide useful information to other third parties, including auditors. We find that these relationships are stronger for small firms and younger firms in line with these firms having higher informational problems, and that audit firm industry specialization plays a significant role in reducing information asymmetry.

The effect of industry classification on analyst following and the properties of their earnings forecasts

ABSTRACTUsing a comprehensive data set, we compare four broadly available industry classification schemes (Standard Industrial Classification (SIC), North American Industry Classification System (NAICS), Fama–French classification (FF) and Global Industry Classification Standard (GICS)) in their effectiveness to group analysts and their earnings forecast properties. We demonstrate the advantage of the GICS to be consistent across different forecasting properties and across different groups of firms. Our results suggest that GICS should be utilized in research designs, either in the primary analysis or as a necessary corroboration.

Analystss Long-Horizon Earnings Forecast Properties and Long-Horizon Macroeconomic Forecast Optimism

We examine whether the properties of earnings forecasts – bias and dispersion are different across periods when macroeconomic forecasts are optimistic than non-optimistic, and whether this difference in analyst forecast optimism is stronger during recessionary periods. We find that the long-horizon earnings forecasts are more optimistically biased in periods when the macroeconomic forecasts are optimistically biased as well, and the bias is more pronounced during periods of recession. We also find that the long-horizon earnings forecast dispersion is lower in periods when the long-horizon macroeconomic forecasts are optimistic than in other periods. These results suggest that firms that meet or beat earnings forecasts when there is no recession and macroeconomic forecast is optimistic are likely to have opportunistically biased their long-term forecasts and walked them down, i.e. opportunistic; and that firms that meet or beat earnings forecasts when there is recession and macroeconomic forecast is optimistic are likely to be the ones that are positioned to perform well when the economy recovers. Consistent with this we find that premium for meeting or beating the analysts’ earnings forecasts is highest in periods when there is recession and macroeconomic forecasts are optimistic; and there is no premium when there is no recession and macroeconomic forecast is optimistic. Collectively, the results show the interaction between the macroeconomic outlook and firm-level forecast properties.

Do analysts understand the economic and reporting complexities of derivatives?

We investigate whether and how the complexity of derivatives influences analysts׳ earnings forecast properties. Using a difference-in-differences design, we find that, relative to a matched control sample of non-users, analysts׳ earnings forecasts for new derivatives users are less accurate and more dispersed after derivatives initiation. These results do not appear to be driven by the economic complexity of derivatives, but rather the financial reporting of such economic complexity. Overall, despite their financial expertise, analysts routinely misjudge the earnings implications of firms׳ derivatives activity. However, we find evidence that a series of derivatives accounting standards has helped analysts improve their forecasts over time.

Do Analysts Understand the Economic and Reporting Complexities of Derivatives?

We investigate whether and how the complexity of derivatives influences analysts’ earnings forecast properties. Using a difference-in-differences design, we find that, relative to a matched control sample of non-users, analysts’ earnings forecasts for new derivatives users are less accurate and more dispersed after derivatives initiation. These results do not appear to be driven by the economic complexity of derivatives, but rather the financial reporting of such economic complexity. Overall, despite their financial expertise, analysts routinely misjudge the earnings implications of firms’ derivatives activity. However, we find evidence that a series of derivatives accounting standards has helped analysts improve their forecasts over time.

A Plain English Measure of Financial Reporting Readability

Over the past decade, a burgeoning literature has emerged using textual analysis to examine the impact of financial reporting readability on capital markets. Despite the rapid growth of this literature, clear guidance on measuring readability in financial texts is rather limited. In this study, we introduce a new measure of readability, the Bog Index, which is designed to capture the plain English attributes of disclosure (e.g., active voice, fewer hidden verbs). We then validate this new measure based on a combination of regulatory guidance, experiments, and archival tests using a regulatory intervention related to the readability of prospectus filings. After validating this measure, we next examine the extent to which different readability measures are associated with future stock market volatility and equity analysts’ earnings forecast properties. We find that the Bog Index has nearly a twenty-five percent greater association with future stock return volatility than any other measure of readability. In contrast, only quantity-based measures of disclosure (e.g., total words, file size) are associated with analyst forecast accuracy. Combined, this evidence suggests that financial statement users may be affected by different attributes of readability. Finally, we use both archival and experimental evidence to demonstrate the importance of understanding the underlying drivers of quantity-based measures of readability. In particular, we caution researchers that a vast amount of the variation in the file size measure over time is driven by the inclusion of content unrelated to the underlying text in the 10-K (e.g., HTML, XML, PDFs).

IAS 39 reclassification choice and analyst earnings forecast properties

In October 2008, the International Accounting Standards Board amended IAS 39 to allow banks to retroactively reclassify financial assets that previously were measured at fair value to amortized cost. By reclassifying financial assets, a bank can potentially avoid recognizing the unrealized fair value losses and thereby increase its income and regulatory capital during a market downturn. We examine the implications of the reclassification decision by banks for the properties of financial analyst earnings forecasts during 2008–2009, when economic conditions were highly volatile. We find that the reclassification choice during the financial crisis reduced analyst forecast accuracy and increased forecast dispersion. We also find that the observed decline in analyst forecasting ability is limited to the year of adoption when the economic environment was highly volatile.

Auditor Governance, Institutions and Analyst Forecast Properties: International Evidence

ABSTRACTThis paper investigates how political and legal institutions affect the governance role of auditors for a sample of firms originating in 42 countries. Prior studies focus on investor protection, but I focus on political rights as well. Specifically, I investigate how institutions and audit quality affect financial statement users' decision-making by considering properties of analysts' earnings forecasts. The evidence shows that forecast accuracy is lower and forecast dispersion higher for firms operating in countries with fewer political rights. Of particular interest is the finding that the association between Big 4 audits and earnings forecast properties is stronger in weak political environments. This finding suggests that auditors play an important—and up to now undocumented—governance role when political rights are low and political forces influential. My results also indicate that reporting reliability increases as investor protection becomes stronger. However, this result only holds for Big 4 clients, consistent with the notion that audits play a greater governance role in stronger legal environments.

The effect of Regulation FD on the properties of management earnings forecasts

We investigate Regulation FD’s (FD) effect on management earnings forecast properties. We posit FD’s prohibition on private manager-analyst communication reduces (increases) optimism (pessimism) in management earnings forecasts. Prior to FD, managers could avoid publicly retracting prior optimistic forecasts by privately communicating with analysts, who could lower investor expectations with a new analyst forecast. After FD, managers with optimistic forecasts must either publicly admit their optimism by issuing a new management forecast or they must negatively surprise investors at the earnings announcement. Further, FD forces managers to use public forecasts instead of private communications to establish beatable expectations. Our evidence suggests FD reduced optimism in management forecasts. This reduction in optimistic bias is not offset by an increase in pessimistic bias. Consistent with this, we further find post-FD improvements in forecast accuracy and informativeness. We find no such changes around several potentially confounding events or for foreign firms surrounding FD. Overall, our evidence suggests FD improved firms’ forecast properties (less bias, greater accuracy, and greater informativeness).

An Investigation Of The Comparative Accuracy And Bias Of Equity Securities Analysts East And West European Firms Earnings Forecasts

This research investigates the comparative accuracy and bias of West European and East European firms equity securities analysts earnings forecasts for 29 European countries 12 of which are characterized as being East European. We utilize measures of equity securities analysts earnings forecast accuracy and bias in making comparisons of the statistical properties of earnings forecasts for firms having domiciles in East European and West European countries. Our results indicate that securities analysts earnings forecasts for companies domiciled with East European countries display larger forecast error and greater degree of optimistic forecast bias. Our results persist after controlling for cross-listing of ADRs on US securities exchanges. We generalize our results using the growing literature on the ever-changing characteristics of the Russian people, Russian business professionals and the rapidly evolving Russian stock market and the transitional Russian political economy.

An Investigation Of The Impact Of Degree Of IFRS Implementation On The Comparative Accuracy And Bias Of Equity Securities Analysts East And West European Firms Earnings Forecasts

<p class="MsoBodyText3" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">This research investigates the comparative impact of country specific degree of IFRS implementation upon the accuracy and bias of West European and East European firms equity securities analysts earnings forecasts for 29 European countries 12 of which are characterized as being East European.<span style="mso-spacerun: yes;">  </span>We utilize measures of equity securities analysts earnings forecast accuracy and bias in making comparisons of the impact of country specific degree of IFRS implementation upon the statistical properties of earnings forecasts for firms having domiciles in East European and West European countries.<span style="mso-spacerun: yes;">  </span>Our results indicate that (1) analysts earnings forecast accuracy and earning forecast bias decreases in the sense that their association with magnitudes earnings changes decreases in relation with country specific degree of implementation of IFRS and (2) the degree of reduction in analysts earnings forecast accuracy and bias is statistically more pronounced for East European firms than for West European Firms.<span style="mso-spacerun: yes;">  </span>Our results persist after controlling for cross-listing of ADRs on US securities exchanges.<span style="mso-spacerun: yes;">   </span>Bases upon this evidence we conclude that the benefits of implementation of IFRS is marginally greater for East European firms that for West European firms.</span></span></p>

The Effect of Institutions and Big 4 Audits on Properties of Analyst Forecasts

This paper investigates how political and legal institutions affect the governance role of auditors for a sample of firms originating in 42 countries. Prior studies focus on investor protection, but I focus on political rights as well. Specifically, I investigate how institutions and audit quality affect financial statement users’ decision-making by considering properties of analysts’ earnings forecasts. The evidence shows that forecast accuracy is lower and forecast dispersion higher for firms operating in countries with fewer political rights. Of particular interest is the finding that the association between Big 4 audits and earnings forecast properties is stronger in weak political environments. This finding suggests that auditors play an important — and up to now undocumented — governance role when political rights are low and political forces influential. My results also indicate that reporting reliability increases as investor protection becomes stronger. However, this result only holds for Big 4 clients, consistent with the notion that audits play a greater governance role in stronger legal environments.

Analysts’ Forecasts During Forced CEO Changes

Purpose: The purpose of this paper is to examine analysts’ earnings forecasts during a period of heightened uncertainty and forecasting complexity, that of a forced change of CEO. How well do analysts utilise their information advantage to reduce information uncertainty between management and investors?Design/Methodology/Approach: This paper uses a sample of Australian companies that are followed by analysts between 1999 and 2009, to examine the relation between properties of analysts’ forecasts (accuracy, dispersion, coverage and bias) and forced CEO turnover. Findings: Relative to firms not undergoing CEO changes, forecasting accuracy is lower and earnings forecasts are more optimistic for firms experiencing forced CEO turnover. However dispersion and analyst coverage are not statistically different. The results are consistent with the management insider information access hypothesis, in which analysts use optimistic earnings forecasts to curry favour with firm management.Practical Implications: Forced CEO turnover events provide a challenge to the forecasting environment for analysts. During CEO changes, investors should be aware that forecasts are less accurate and have an optimistic bias. Originality/Value: Whilst the literature has examined analysts’ earnings forecast properties in a number of contexts that change forecast complexity, this paper is the first to examine an extensive range of forecast properties in the context of CEO changes.