Earnings Revisions Research Articles

Despite Fundamentals, Low-Volatility Stocks are Not Always the Least Risky

In this paper we want to trace back the origin of what has been called the low volatility In particular we are in line with the work of [11, Hsu, Kudoh and Yamada (2013)] which demonstrated the fact the analysts were too optimistic on future Earnings estimates. We have conducted a similar analysis on European stocks from 1998 to 2017. In addition to the initial findings of this paper we have studied the Earnings forecast bias on long-term Earnings growth, as well as their consequence on Earnings revisions on the most volatile stocks. W can confirm that consensus forecasts systematically overestimate EPS and future EPS growth for high-vol stocks. We believe that these behavioural misperceptions are the main structural drivers of this anomaly. Persistent over-optimism bias on high-vol stocks induces negative EPS revisions and negative EPS surprises that, in turn, favour the performance of low-vol stocks. Furthermore we have extended this study to the analysis of low-beta and low-correlation stocks where similar behavioral bias has been seen.

Environmental Performance and Analyst Information Processing Costs

This study tests the hypothesis that analyst information processing costs vary positively in the level of firms’ environmental performance ratings. Based on proxies for analyst information processing costs (e.g., the number of stocks followed, frequency and timeliness of earnings revisions, the accuracy of earnings forecasts), we find results to support this hypothesis. These findings deepen our knowledge of the informational setting that conditions analysts’ decisions by identifying the cost of processing environmental information as a potential determinant of the stocks analysts include in their portfolios. Our findings also have implications for capital market efficiency because the higher information processing costs induced by environmental performance ratings could discourage analysts from developing trading strategies to exploit asset mispricing.

Investors’ Reactions to Analysts’ Forecast Revisions and Information Uncertainty

This study examines the relationship among analysts’ earnings forecast revisions, information uncertainty, and stock returns and provides new evidence that stock price drift occurs after analysts’ earnings forecast revisions. Using data from the Australian stock market over the period of 1992 to 2009, we find that the stocks with upward earnings revisions experience positive returns, while stocks with downward revisions have negative returns. The effect is more prominent in stocks with high information uncertainty. The results are robust after controlling for market conditions, seasonality, and risks. Our evidence supports the conservatism bias model that investors tend to underweight the public information, such as analysts’ earnings forecast revisions. Importantly, our evidence provides possible explanations about the violation of the efficient market hypothesis. Our results suggest that the conservative bias causes investors not to sufficiently update their beliefs and eventually results in subsequent return continuation as investors’ underreaction to analysts’ earnings forecast revision is stronger with higher information uncertainty.

Should Auditors Be Concerned About Pleasing the Client? An Examination of Auditor Changes Subsequent to Earnings Revisions

In this paper, we investigate the consequences that auditors and their clients face when earnings announced in an unaudited earnings release are subsequently revised, presumably as a result of year-end audit procedures, so that earnings as reported in the 10-K differ from earnings as previously announced. Specifically, we examine whether the likelihood of an auditor ‘losing the client’ is greater following such revisions, and whether the likelihood of dismissal is influenced by revisions that more negatively impact earnings, that cause the client to miss important earnings benchmarks, by greater local auditor competition, or by auditor characteristics. We also examine audit pricing subsequent to audit-related earnings revisions for evidence of pricing concessions to retain the client. Finally, we examine whether client executives experience a greater likelihood of turnover following an audit-related earnings revision, and whether this varies by the type of revision. Consistent with expectations, we find that auditor dismissals are more likely following audit-related earnings revisions. We also find that dismissals are more likely when revisions cause clients to miss important benchmarks and when there is greater local auditor competition. Among non-dismissing clients, we find that future audit fees are lower when the effect of the revision on earnings is more negative, consistent with auditors offering price concessions to retain clients when revisions are more displeasing. We also find a greater likelihood of future chief financial officer (CFO) turnover as the effect of the revision worsens. Our findings offer important insights into the consequences that auditors face when balancing their responsibility for high audit quality and client satisfaction, as well as into the consequences that CFOs face when releasing inflated but not fully audited earnings.

The efficiency of earnings forecast pricing

Prior research has suggested that the information content associated with analysts’ forecast revisions is not immediately incorporated into a firm’s stock price. We find that the apparent anomaly is concentrated in low-priced firms that receive favorable earnings revisions. Variables (such as analyst coverage and celebrity status) cannot reliably explain variations in price formations. Finally, we find that the magnitude of the post-forecast revision drift has decreased after 2002. Overall, our results suggest that the analysts’ forecast revisions anomaly can be explained by a combination of random statistical variations and transaction costs.

What are the Benefits of Audited Disclosures to Equity Market Participants?

This study documents that the market places more reliance on earnings announcements with a completed audit than on earnings announcements with an incomplete audit. The PCAOB’s Auditing Standards No. 2 and 3 (AS2/3) resulted in the majority of firms issuing annual earnings announcements prior to audit completion. Prior research documents an increase in earnings revisions around the implementation of AS2/3, a negative market reaction to earnings revisions, and lower investor reliance on earnings announcements that foreshadow an impending earnings revision. We argue that the issuance of earnings announcements with a completed versus an incomplete audit has a more fundamental impact on the market. Specifically, earnings announcements with an incomplete audit lead investors to perceive lower financial reporting quality and to place less reliance on the earnings announcement even in the absence of an impending or ex post earnings revision. Using both difference-in-difference and cross-sectional analyses, we find that earnings announcements with a completed audit are associated with a larger market reaction than earnings announcements with an incomplete audit. This differential market reliance on earnings announcements with a completed versus an incomplete audit persists after the implementation of AS2/3 into a more steady-state regulatory environment from 2007 through 2013.

How Informative Is Qualitative Management Earnings Guidance Compared to Quantitative Guidance?

Management earnings guidance is one of the primary sources of earnings expectations for market participants. Broadly speaking, managers disclose their guidance either quantitatively or qualitatively. Comparing these guidance forms by type of news, I find that qualitative bad news forecasts are more informative to investors (i.e., have a stronger market reaction) and analysts (i.e., have larger earnings revisions) than quantitative bad news forecasts. With respect to good news earnings forecasts, I find no significant effect of guidance form. By way of an explanation, I find that qualitative bad news forecasts are more accurate ex post than quantitative bad news forecasts. Empirical results indicate that investors view qualitative bad news forecasts as a signal that the forthcoming earnings surprise may be more negative than anticipated. This result contrasts with prior studies which generally find that more precise earnings guidance is more informative – at least among alternative types of quantitative earnings guidance. Supplemental analysis reveals that managers‘ concern for litigation exposure provides a potential explanation as to why firms might issue qualitative bad news forecasts over quantitative forecasts.

Do Analysts Use Their Cash Flows Forecasts When Setting Target Prices?

This study examines whether analysts’ decisions to issue cash flows forecasts depend endogenously on their decision to use these forecasts to set target prices. An endogenous switching regression model, with analyst report regimes of disclosure and non-disclosure of cash flow forecasts, shows that cash flow revisions are more important than earnings revisions in explaining the magnitude of target price revisions in the cash flow disclosure regime. Cash flow forecasts influence and are influenced by analyst valuation choices. Additional analysis shows that cash flow-based pseudo-target prices play a greater role in explaining target price implied returns than do earnings-based pseudo-target prices. These findings provide insights into analysts’ valuation decision processes.

Common Factors in Analysts’ Earnings Revisions: The Role of Changing Economic Conditions

We examine the role of macroeconomic announcements in shaping the earnings forecasts of equity market analysts. We find that earnings forecasts strongly respond to macroeconomic releases signaling changes in overall business conditions after controlling for analysts’ learning from firm- and industry-specific earnings surprises. We find this effect is industry-specific as analysts’ reliance on macroeconomic news is greater when they follow companies operating in more cyclical industries. In addition, medium-term forecasts respond much more strongly to macroeconomic news than forecasts for the current fiscal year. On average, macroeconomic surprises leads analysts to revise their current year earnings forecasts for cyclical firms by about 3 cents, and subsequent year’s forecasts by about 5 cents. This clearly suggests a strong stock price impact of macroeconomic news via the earnings channel. Macroeconomic reports convey earnings-relevant information, in particular, for longer-term forecasts. In fact, it is highly rewarding for analysts to incorporate macroeconomic information as accuracy of analysts’ earnings forecasts is higher when they put more weight on macroeconomic information in addition to firm-and industry-specific information. Our findings provide a rational explanation of herding suggesting that co-movement among equity analysts may be due to similar responses to public (macroeconomic and firm- and industry-specific) news. Moreover, our findings have important implications for stock valuation models whose performance depends largely on forecast accuracy as well as for recently developed mechanical earnings forecast models.

Common Factors in Analysts’ Earnings Revisions: The Role of Changing Economic Conditions

Common Factors in Analysts’ Earnings Revisions: The Role of Changing Economic Conditions

Global Tactical Sector Allocation: A QuantitativeApproach

Doeswijk and vanVliet examine seven variables for global tactical sector allocation (GTSA) purposes. They construct 10 global sector indices over the extended sample period from 1970 to 2008, enabling them to test previously documented variables on a global basis and to examine whether they continued to work after their publication dates. Doeswijk and van Vliet document significant returns for the following strategies: momentum (1-month and 12–1 month), earnings revisions, and sell-in-May seasonal, also after their publication dates. By contrast, monetary policy and valuation (mean reversion and dividend yield) fail to predict global sector returns. The authors’ out-of-sample tests reveal an average decay in performance of about one-third. A long–short GTSA strategy that combines momentum with seasonal has an annual success ratio of 82% and delivers a compounded annual return of 9.9% after transaction costs. The authors believe that a global sector allocation study with such a long sample period and with such a broad range of variables has not been conducted before. <b>TOPICS:</b>Portfolio construction, accounting and ratio analysis

Earnings Revisions in SEC Filings From Prior Preliminary Announcements

This article investigates earnings revisions that occur between preliminary earnings announcements and the immediate subsequent Securities and Exchange Commission (SEC) filings. On average, the absolute value of the revision is 2.9% of the market value of equity where earnings were revised by more than US$100,000. The authors find that earnings revisions are more likely to occur for firms that are more complex, are more financially leveraged, have greater earnings volatility, have losses, and have switched auditors. They find that investors react to the new information in the earnings revisions but find mixed evidence about whether the act of revision itself indicates lower earnings quality to investors. The authors’ findings suggest that financial analysts, investors, and regulators alike should pay close attention not only to an earnings surprise at the preliminary earnings announcement date but also at the SEC filing date to determine whether a subsequent earnings surprise occurs.

Earnings Revisions in SEC Filings from Prior Preliminary Announcements*

This paper investigates earnings revisions that occur between preliminary earnings announcements and the immediate subsequent SEC filings. On average, the absolute value of the revision is 2.9% of the market value of equity where earnings were revised by more than $100,000. We find that earnings revisions are more likely to occur for firms that are more complex, more financially leveraged, have greater earnings volatility, have losses and that have switched auditors. We find that investors react to the new information in the earnings revisions, but find mixed evidence about whether the act of revision itself indicates lower earnings quality to investors. Our findings suggest that financial analysts, investors and regulators alike should pay close attention not only to an earnings surprise at the preliminary earnings announcement date, but also at the SEC filing date to determine if a subsequent earnings surprise occurs.

Market Reaction to Entry Timing of Corporate Capital Investment Announcement: Evidence from Announcement-Period Abnormal Returns and Analysts' Earnings Forecast Revisions

The main purpose of this study is to investigate the relative advantages and disadvantages of first-mover hypotheses by examining the role of entry timing in the announcement effects of corporate capital investment. Our empirical results suggest that those firms first announcing their capital investment will experience greater share-price effects than the followers in the same industry. In addition, the financial analysts tend to revise upward their announcement-period earnings forecasts for those capital investment announcers, suggesting that announcements of capital investment convey positive information about the earnings prospects of the announcing firms. Furthermore, analysts' revisions of earnings forecasts subsequent to such announcements are more favorable for leading-announcer firms than the followers. Overall, our findings provide fully support for the first-mover advantages hypothesis, indicating the importance of the entry timing when announcing a corporate capital investment.

Global Tactical Sector Allocation: A Quantitative Approach

This study examines seven variables for Global Tactical Sector Allocation (GTSA) purposes. We construct 10 global sector indices over the extended sample period from 1970 to 2008. This enables us to test previously documented variables on a global basis and to examine whether they continued to work after their publication dates. We document significant returns for momentum (1-month and 12-1 month), earnings revisions and Sell in May seasonal, also after their publication dates. By contrast, monetary policy and valuation (mean-reversion and dividend yield) fail to predict global sector returns. Our out-of-sample tests reveal an average decay in performance of about one third. A long-short GTSA strategy that combines momentum with seasonal has an annual success ratio of 82% and delivers a compounded annual return of 9.9% after transaction costs. To the best of our knowledge, a global sector allocation study with such a long sample period and with such a broad range of variables has not been conducted before.

Understanding Analysts' Earnings Expectations: Biases, Nonlinearities, and Predictability

Financial analysts’ earnings forecasts are a key determinant of stock prices and understanding how these forecasts evolve over time is important. This paper studies the asymmetric behavior of negative and positive values of analysts’ earnings revisions and links it to the conservatism principle of accounting. Using a new three-state mixture of log-normals model that accounts for dierences in the magnitude and persistence of positive, negative and zero revisions, we find evidence that revisions to analysts’ earnings expectations which under conventional assumptions should follow a martingale dierence process can be predicted using publicly available information such as lagged interest rates and past revisions. We also find that our forecasts of revisions to analysts’ earnings estimate help predict the actual earnings figure beyond the information contained in analysts’ earnings expectations.

Cashflow risk, systematic earnings revisions, and the cross-section of stock returns

The returns of stocks are partially driven by changes in their expected cashflow. Using revisions in analyst earnings forecasts, we construct an analyst earnings beta that measures the covariance between the cashflow innovations of an asset and those of the market. A higher analyst earnings beta implies greater sensitivity to marketwide revisions in expected cashflow, and therefore higher systematic risk. Our analyst earnings beta captures exposure to macroeconomic fluctuations and has a positive risk premium that provides a partial explanation for the value premium, size premium, and long-term return reversals. From 1984 to 2005, 55.1% of the return variation across book-to-market, size, and long-term return reversal portfolios is captured by their analyst earnings betas.

Myopic Extrapolation, Price Momentum, and Price Reversal

We find that last-year's winners have lower expected returns than losers. However, this is followed by prior winners experiencing more positive earnings shocks than losers for at least two quarters after portfolio formation. After that time frame, the relative earnings shocks display the opposite pattern. If investors, when valuing securities, were to myopically extrapolate current earnings shocks as if they were long-lasting, then we would observe price momentum in the short run, followed by reversal in the long run. This hypothesis has two unique predictions: (i) current earnings shocks propel investors to myopically adjust forecasts on future cash flows, from short run to long run; and (ii) current earnings shocks and revisions to expected future cash flows dominate past returns in explaining price momentum and reversal. We find strong support for both predictions in the data.

Uncertainty and Expectation Revisions after Earnings Announcements*

Bayesian theory predicts an increase in market participants' reliance on reported current earnings to revise their expectations of future earnings when the uncertainty in future earnings is higher. Prior studies focus on price reactions and find negative associations between measures of earnings uncertainty and investors' reliance on reported current earnings. This study examines analysts' forecast revisions (of future earnings) around the announcements of current period earnings and finds positive associations between measures of earnings uncertainty and analysts' reliance on reported current earnings. The findings suggest that uncertainty measures and discount rates are correlated, and cross-sectional differences in the discount rate taint the interpretation of price reactions as evidence of expectation revisions under uncertainty. This study sheds additional light on the complex relationships among earnings uncertainty measures, price reactions to earnings surprise, and cost of capital.

The Global Financial Crisis and the Centro Properties Group Earnings Revision and Refinancing Announcements: An Event Study

This study analyses the impact of the global financial crisis using Centro Properties Group’s earnings revision and refinancing announcements on December 17th 2007 as the event date to investigate the change in risk profile for A-REITs that were included in the S&P/ASX 300. The study finds that nine of the 25 A-REIT constituents on the S&P/ASX 300 recorded statistically significant negative abnormal returns on 17th December 2007 and that the systematic risk for many A-REITs moved significantly higher after this date. This increased systematic risk has major implications for the cost of capital to the sector.