Earnings Per Share Forecasts Research Articles

The Information Content of Managers' Forward-Looking Disclosures

I use textual analysis to measure the amount of forward-looking disclosures in public firms' 10-K reports, and relate it to the forecast revisions of sell-side analysts around the publication dates of these reports. By focusing on the revisions of forecasts made after the publication of a firm's financial results for the fiscal year covered by its report, I ensure that my findings are not driven by the simultaneous disclosure of forward-looking and financial information. Using a sample of 13484 firm-year observations, I find that more analysts revise their 1-year earnings per share (EPS) forecasts in response to a 10-K filing if the corresponding report contains more forward-looking expressions. Furthermore, among those analysts who responded to a report publication, the error of their revised forecasts is smaller for firms whose reports contain more forward-looking statements. These findings suggest that analysts perceive managers' forward-looking disclosures to be informative, and that their perception is justified. Further analyses reveal that the perceived and actual informativeness of such disclosures is more pronounced among firms which are opaque or experienced a strong recent profitability growth. I also find evidence that managers' forward-looking disclosures affect analysts' longer-term EPS forecasts in a similar way as their short-term forecasts.

Excess Cash and the Effects of Share Repurchases

This study examines the impact of accretive share repurchases, which increases earnings-per share (EPS) at least by one cent to meet or beat analysts’ EPS forecasts, on firm investments, financial performance, and firm value, focusing on excess cash holdings. Employing fuzzy regression discontinuity design, we find that firms with excess cash spend a large amount of cash on accretive share repurchases when they would otherwise have to announce a negative EPS surprise, while firms without excess cash do not. Furthermore, we find that accretive share repurchases have a negative impact on firm investment and financial performance among firms with excess cash, and the value of the excess cash deteriorates when the firm pursues accretive share repurchases using its excess cash. Our findings suggest that holding more cash than necessary causes another agency problem, accretive share repurchase, which leads to a reduction in investments, poor financial performance, and a discount in firm value.

Sustainable Development, Stakeholder Engagement and Analyst Forecasts’ Accuracy: Positive Evidence from the Spanish Setting

AbstractThis study looks into the effects of voluntary sustainability reporting in analysts’ earnings forecasts as a driver for sustainable development. The methodology used is based on a regression model to test whether the issuance of a CSR stand‐alone report affects analysts’ forecast errors and forecast dispersion. Forecast error refers to the difference between the forecasted earnings per share (EPS) and the actual EPS. Dispersion refers to the standard deviation in EPS forecasts between analysts following the same firm. Our study in the Spanish context includes 527 observations from listed firms and covers the period 2005–2010. We provide evidence that there is a negative statistically significant association between the absolute forecast earnings error and the publication of a sustainability report. However, we find that the CSR reports have lost power in reducing the earnings forecast error if we compare analysts' activity before the financial crisis and during the crisis itself, so we open up a question for future research to check whether this is a consistent trend or whether in times of economic recovery this phenomenon regains power. The main conclusion of this paper points to the importance of sustainable development and stakeholder engagement through the issuance of CSR reports, which can help the smooth running of capital markets in a context of increasing sensitiveness to social responsible investment. Our study in this field is pioneering in the Spanish setting, which is especially interesting given the growing trend to publish CSR reports in this country. Copyright © 2015 John Wiley & Sons, Ltd and ERP Environment

Benefits of management disclosure precision on analysts’ forecasts

Purpose – The purpose of this paper is to examine the impact of management’s choice of forecast precision on the subsequent dispersion and accuracy of analysts’ earnings forecasts. Design/methodology/approach – Using a sample of 3,584 yearly management earnings per share (EPS) forecasts and 10,287 quarterly management EPS forecasts made during the period of 2002-2007 and collected from the First Call database, the authors controlled for factors previously found to impact analysts’ forecast accuracy and dispersion and investigate the link between management forecast precision and attributes of the analysts’ forecasts. Findings – Results provide empirical evidence that managements’ disclosure precision has a statistically significant impact on both the dispersion and the accuracy of subsequent analysts’ forecasts. It was found that the dispersion in analysts’ forecasts is negatively related to the management forecast precision. In other words, a precise management forecast is associated with a smaller dispersion in the subsequent analysts’ forecasts. Evidence consistent with accuracy in subsequent analysts’ forecasts being positively associated with the precision in the management forecast was also found. When the present analysis focuses on range forecasts provided by management, it was found that lower precision (a larger range) is associated with a larger dispersion among analysts and larger forecast errors. Practical implications – Evidence suggests a consistency in inferences across both annual and quarterly earnings forecasts by management. Accordingly, recent calls to eliminate earnings guidance through short-term quarterly management forecasts may have failed to consider the linkage between the attributes (precision) of those forecasts and the dispersion and accuracy in subsequent analysts’ forecasts. Originality/value – This study contributes to the literature on both management earnings forecasts and analysts’ earnings forecasts. The results assist in policy deliberations related to calls to eliminate short-term management earnings guidance.

Managerial Optimism Versus Opportunism as a Motivation for Repurchases: The Case of Accelerated Share Repurchases

Accelerated share repurchases (ASRs) represent an important recent innovation in repurchase methods. While corporate managers and investment bankers often cite signaling undervaluation as a motivation for ASRs, the financial press highlights managing earnings per share (EPS) as an alternative motivation. I find that 29 percent of ASR firms (“EPS-suspect” firms) would have missed the consensus EPS forecasts had they not implemented the repurchase. Managerial incentives — securing bonuses and maintaining reputation by avoiding EPS misses — appear to lie behind this opportunistic use of ASRs. Upward revision observed in analysts’ EPS forecasts upon the announcement of ASRs is short-lived, indirectly facilitating firms’ use of ASRs to meet or beat consensus forecasts. Unlike EPS-suspect firms, non-EPS-suspect firms exhibit positive abnormal operating performance during the post-ASR period, suggesting that these firms use ASRs as a signaling device rather than as an earnings management device. I also find evidence that investors see through both motives. Evidence also suggests that, despite being prone to managerial opportunism, ASRs have an edge over regular open market repurchases with respect to sending a more credible signal of undervaluation to investors.

Intangible Information and Analyst Behavior

In this paper, we study whether firm intangible information affects analyst behavior. We find direct evidence that when analysts make more judgment-intensive decisions, such as issuing stock recommendations, they overweight intangible information, leading to overreaction to intangible information. On the contrary, when analysts make less judgment-intensive decisions, such as earnings per share (EPS) forecasts, there is no such evidence of overreaction. More specifically, analyst recommendations are much more sensitive to intangible information, while EPS forecasts are more sensitive to tangible information. The sensitivity of long-term growth forecasts to intangible and tangible information fall in between. We also test and find that the overconfidence bias in analyst recommendations contributes to the market overreaction to intangible information. Our results appear to be consistent with the overconfidence hypothesis put forth by Daniel and Titman (2006).

Managers' EPS Forecasts: Nickeling and Diming the Market?

ABSTRACT: Nearly half of managers' forecasts of annual earnings per share (EPS) end in nickel intervals, whereas only about 20 percent of actual EPS end in nickel intervals. We provide evidence on the attributes, determinants, and consequences of this systematic wedge between managers' predictions and firms' ex post actual performance. Managers' nickel forecasts are not simply a benign response to uncertainty about upcoming earnings, because nickel forecasts are not only less accurate, but also they are more optimistically biased than non-nickel forecasts. In addition to uncertainty, efforts to protect the firm's proprietary information and self-serving opportunism in response to managers' economic incentives also play incremental roles in explaining managers' propensity to issue forecasts heaped at nickel intervals. We also find that managers' nickel forecasts spur even active analysts to issue forecasts heaped at nickel intervals, although analysts' forecast revisions partially adjust for the optimism and noise in managers' nickel forecasts.

Does Pro Forma Reporting Bias Analyst Forecasts?

ABSTRACT Standard setters put much effort into the development of ‘better’ financial reporting standards, that is, standards that more accurately capture the economic substance of business activities. However, the more sophisticated accounting treatments caused by new standards, and the growing complexity of business activities as such, has made financial reports more difficult to understand. In response to this situation, some companies use pro forma reporting, which means that certain complex items required by financial reporting standards are excluded. This study adopts a user perspective and investigates how pro forma reporting affects analysts' judgments in an experimental setting. On the basis of psychological theory, our hypothesis suggests that analysts' judgments will be affected by differences in the way company performance is presented. Our results show that analysts who received both pro forma and Generally Accepted Accounting Principles (GAAP) information made significantly higher earnings per share (EPS) forecasts than those who received GAAP information only. It is argued that positive framing and higher levels of anchor explain this result, which suggests in turn that analysts' EPS forecasts can be manipulated by alternative ways of presenting company performance. Some possible implications of this finding for standard setters are discussed.

Prospective Earnings per Share

This report considers the relation between pro-forma and forecast consensus earnings per share (EPS) figures in terms of six measures identified, qualitatively, as good indicators for quality of earnings. These are, return on capital employed (RoCE), productive asset reinvestment ratio (PARR), cash realisation (CR), tax rate (TR), Standard and Poors (S&P) equity rating and S&P debt rating as identified by Merrill Lynch. The choices are thought to capture aspects of and differentiate between long term strategies and short term, non-sustainable earnings through financial engineering. Analyses are run on ten years of data from 1992 to 2001 for 131 S&P500 companies also provided by Merrill Lynch, using consensus EPS forecasts one year ahead. This sample is smaller than 500 because the index is subject to change, with companies being added and removed based on their market share or other factors. S&P debt ratings were not available over the entire sample length for all companies thus cutting the two ratings from analyses. However, correlations between the two S&P ratings and other indicator measures are found to be high so their removal is not a significant problem. The ten years are split into three phases based on market sentiment: 1992-1995 Bull market, emphasis on sustainable growth 1996-1999 Bull market, emphasis on high earnings per share (bubble) 2000-2001 Bear market, refocussing on sustainability. Given the radical change in conditions after 2000, the sample is enlarged for 2000 to 2001 and investigated separately. This increases sample size to 366, but does not change results significantly or give any further insights. The ability of the four indicator measures to connect EPS predictions to released figures appears weak in analyses. Adding lagged information and market proxies improves the situation, but unfortunately not sufficiently for linear regression to be used confidently for out-of-sample prediction. Given a sample of ten observations in time, non-linear regressions were not carried out. The indicator measures are not thought to be effective indicators of companies' future performance.

Analyst Conflicts and Research Quality

This paper examines whether the quality of stock analysts’ forecasts is related to conflicts of interest from their employers’ investment banking (IB) and brokerage businesses. We consider four aspects of forecast quality: accuracy, bias, and revision frequency of quarterly earnings per share (EPS) forecasts and relative optimism in long-term earnings growth (LTG) forecasts. Using a unique dataset that contains the annual revenue breakdown of analysts’ employers among IB, brokerage, and other businesses, we uncover two main findings. First, accuracy and bias in quarterly EPS forecasts appear to be unrelated to conflict magnitudes, after controlling for forecast age, firm resources and analyst characteristics. Second, relative optimism in LTG forecasts and the revision frequency of quarterly EPS forecasts are positively related to the importance of brokerage business to analysts’ employers. Additional tests suggest that the frequency of quarterly forecast revisions is positively related to analysts’ trade generation incentives. Our findings suggest that reputation concerns keep analysts honest with respect to short-term earnings forecasts but not long-term growth forecasts. In addition, conflicts from brokerage appear to play a more important role in shaping analysts’ forecasting behavior than has been previously recognized.

Simulating management's earnings-per-share forecasts

This study attempts to simulate management's earnings per-share forecasts using six naive time series models. The results indicate two (random walk and random walk with a drift) of the six models were significantly more accurate than the other four models in simulating management's earnings forecast. Both exhibited a tendency to consistently underforecast earnings, and it was hypoth esized that this could be due to an inherent bias in the data. The results for the remainingfour models were not as favorable. The two submartingales and the simple linear trend models exhibited a high degree of variability in accuracy and significant biases based on the magnitude of the forecast. The arithmetic average model appeared to be unbiased but exhibited a high degree of variability. The results of the study indicate that it may be possible to simulate management's earnings forecasts using relatively naive mathemati cal models.