EPS Forecasts Research Articles

Seeing is believing: are investors’ corporate online visits as informative as site visits?

ABSTRACT This paper examines the post-visit earnings forecast inaccuracy of online visits (visits via videoconferencing) relative to site visits (visits to production or operation sites) with data from China between 2020 and 2021. We use the number of confirmed COVID-19 infections in the city where analysts’ offices are located as an instrument for the choices between online visits and site visits. Our results show that online visits fail to maintain the accuracy of analysts’ EPS forecasts. Moreover, the diminished financial reporting quality of firms amplifies the forecasting disadvantages associated with online visits. Finally, the lack of site observation rather than one-on-one communication is the primary reason for the underperformance of online visits.

Empirical Analysis of Global Markets Herding on COVID-19 Effect

This article investigates the presence of herding on global stock markets during COVID-19. Cross-Sectional Absolute Deviation developed by Chiang and Zheng (2010) and Chang et al. (2000) examine market-wide herding. Results show that herding is prevalent in Brazil, Germany, India, Italy, Korea, China-Shanghai, China-Shenzhen and Turkey. During the epidemic, no evidence of herding was detected in France, Hong Kong, Indonesia, Japan, Malaysia, Poland, the United Kingdom and the United States. It has been shown that the United States and Chinese cross-market herding substantially influences all markets. The impact of analyst information (target price, EPS forecasts and revenue predictions) on herding is shown before the pandemic and weakening during the pandemic. It indicates that investors disregard expert recommendations and liquidate equities during the pandemic. The findings shed light on the occurrence and determinants of herding that causes investors’ to behave irrationally during COVID-19. Policymakers, government and regulators should formulate a more robust policy to monitor, control and oversee the naïve herding that drives fundamentals away from stock prices.

Predicting the Cross-Section of Project Values

To compute the value of a project, the baseline textbook recommendation is to use the Present Value (PV) formula of expected cash-flows, with a discount rate based on the CAPM. In this paper, we ask what is, empirically, the best discounting method. To do this, we study listed firms, whose expected cash-flows are measured through EPS forecasts, and whose actual prices are observed. We compare different discounting approaches of computing the PV. Our metric is the ability of each discounting approach to predict actual market prices. We find that discounting with an imputed Internal rate of return (IRR), computed on comparable firms, obtains very good results. Discounting based on expected returns (such as the CAPM or multi-factor), or a simple multiple approach, performs less well. Significant, but small, improvements can be obtained by allowing, in a simple and actionable way, for a more flexible term structure of expected returns. We benchmark all of our results with flexible, purely statistical models of prices based on Random Forest algorithms. These models do barely better than our preferred, NPV-based methods.

Sell-side analyst heterogeneity and insider trading

This study explores insider trading patterns under different earnings surprises. After controlling for stock market liquidity and earnings announcements returns, we show that insiders sell more aggressively depending on the heterogeneity of analysts whose EPS forecasts are met or beaten to camouflage their trades. Specifically, insiders sell more shares of their company sooner after the publication of earnings when top analysts' forecasts are met or beaten. Consistent with the informed trading literature, insiders strategically select these moments because the stock price impact is low and the legal scrutiny of their trades is minimal. To support this result, we employ an exogenous drop in firms' analyst coverage due to the closure or merger of brokerage houses. Furthermore, in line with the camouflage incentives, by selling after top analysts' forecasts are met or beaten, stock prices adjust slowly to insider trades. Finally, we show that the incentives of insiders to hide their trades are concentrated in opportunistic insiders and members of the top management team, who are more likely to bear the costs of selling shares after positive news.

The Information Content of Analysts' Book Value Per Share Forecasts

We investigate the information content of analysts’ book value per share (BVPS) forecasts. We test whether analysts’ BVPS forecasts are informative about future realizations of other comprehensive income (OCI) and special items controlling for analysts’ EPS forecasts. Our results suggest that analysts’ BVPS forecasts generally incorporate upcoming realizations of OCI and special items, especially for financial firms. We also find evidence that BVPS forecasts provide expectations of non-EPS income, and that the market responds to BVPS innovations, especially BVPS forecasts misses. Finally, we find evidence that analysts provide more BVPS forecasts for financial firms that 1) have greater absolute levels of accumulated other comprehensive income (AOCI) from securities and derivatives, 2) report higher levels of OCI from securities, and 3) hold more opaque financial assets, and for non-financial firms with high absolute levels of pension-related AOCI.

Sell-Side Analyst Heterogeneity and Insider Trading

This study explores insider trading patterns after different earnings surprises. After controlling for stock market liquidity, we show that insiders sell more aggressively depending on the heterogeneity of analysts whose EPS forecasts are met or beaten to camouflage their trades. Specifically, insiders sell more shares of their company sooner after the publication of earnings when top analysts' forecasts are met or beaten. Consistent with the informed trading literature, insiders strategically select these moments because the stock price impact is low and the legal scrutiny of their trades is minimal. To support this result, we employ an exogenous drop in firms' analyst coverage due to closure or merger of brokerage houses. Furthermore, in line with the camouflage incentives, by selling after top analysts' forecasts are met or beaten, stock prices become less efficient as they adjust slowly to insider trades. Finally, we show that the incentives of insiders to hide their trades are concentrated in opportunistic insiders and members of the top management team, who are more likely to bear the costs of selling shares after positive news.

Corporate investment and earnings surprises

ABSTRACTWe find that firm-level investment is negatively related to the likelihood of meeting or beating analysts’ short-term EPS forecasts. In a 35-year panel dataset of US based companies, we find evidence that suggests firms with the best growth opportunities, opaque firms, and firms with higher than usual bonus compensation, are the ones to alter investment in order to beat benchmarks. Utilizing the passage of Sarbanes-Oxley as a natural experiment we find that firms trade off accruals-based earnings management in lieu of investment cuts. Results are robust to a number of covariates, and endogeneity or reverse causality does not seem to drive our inferences. This study suggests that, consistent with survey results from Graham, Harvey, and Rajgopal [2005. “The Economic Implications of Corporate Financial Reporting.” Journal of Accounting and Economics 40: 3–73], managers may reduce or delay corporate investment to meet or beat short-term earnings benchmarks.

Use of Ensemble Forecasts to Investigate Synoptic Influences on the Structural Evolution and Predictability of Hurricane Alex (2016) in the Midlatitudes

Abstract Hurricane Alex was an extremely rare hurricane event, the first North Atlantic hurricane to form in January since 1938. Alex developed from an extratropical low pressure system that formed over the western North Atlantic basin, and then underwent tropical transition after moving to the eastern basin. It subsequently underwent anomalous extratropical transition (ET) just north of the Azores Islands. We examine the factors affecting Alex’s structural evolution and the predictability of that evolution. Potential scenarios of structural development are identified from a 51-member forecast ensemble from the European Centre for Medium-Range Weather Forecasts Ensemble Prediction System (ECMWF-EPS), initialized at 0000 UTC 10 January 2016. The EPS forecasts are clustered using a regression mixture model based on the storm’s path through the cyclone phase space. Composite maps constructed from these clusters are used to investigate the role of synoptic-scale features on the evolving structure of Hurricane Alex as it interacted with the midlatitude flow. Results suggest that the crucial factor affecting this interplay was the behavior of a large extratropical cyclone and its associated cold front and likely warm conveyor belt upstream of Alex; the intensity of these structures determined whether Alex underwent a typical cold-core ET (as observed) or a warm-seclusion ET. The clustering and compositing methodology proposed not only provides a nuanced analysis of the ensemble forecast variability, helping forecasters to analyze the predictability of future complex tropical–midlatitude interactions, but also presents a method to investigate probable causes of different processes occurring in cyclones.

English

The relationship between sustainable practices and a firm’s financial performance is an open debate among academics, managers and investors worldwide. Despite large literature in the field of corporate social responsibility (CSR) and corporate financial performance (CFP), there is still a lack of unanimous consensus around the impact of sustainability on a firm’s economic achievements. This study aims to analyse this relationship and fill some of the gaps within existing literature using two geographical samples, a European and a global one, proceeding to compare obtained results. Such analysis was performed employing an ex ante implied proxy for the cost of equity, which has been selected in order to overcome methodological weaknesses of previous studies. Results show that sustainability can reduce the cost of equity due to lower firm riskiness, as perceived by markets and investors. Geographical specificities, on the other hand, do not play a significant role. CSR practices have the potential to create a type of goodwill or moral capital for more sustainable firms that acts as protection when negative events occur, preserving shareholder value and reducing the firms’ cost of equity. Key words: Cost of equity, Price Earnings Growth (PEG) ratio method, corporate social responsibility (CSR), EPS forecasts, riskiness.

The Revolving Door of Sell-Side Analysts

ABSTRACT Equity analysts are often hired by firms they cover. I document the extent to which this revolving door phenomenon impairs analysts' independence. I do this by examining the presence of biased research reports issued during the year before analysts are employed by a firm they cover. I find that during their final year, revolving door analysts bias their EPS forecasts, their target prices, and their recommendations in a direction that suggests that they are attempting to gain favor from their prospective employers. Specifically, relative to other analysts, revolving door analysts issue more optimistic reports on the firms that hire them, and they issue more pessimistic reports on firms that do not hire them. These results suggest the presence of strategic bias, although more innocuous interpretations cannot be completely ruled out. JEL Classifications: G14; G17; G24; G28; M41. Data Availability: Data are available from public sources identified in the text.

Managerial Ability and Forecast Accuracy

We examine the relation between managerial ability and management forecast accuracy. We find that forecast accuracy is positively associated with managerial ability in the case of sales forecasts. Specifically, more able managers are associated with lower magnitude’s forecast errors in the case of sales forecasts. Additional analysis finds that managerial ability is immaterial to EPS figures’ forecast accuracy; i.e. EPS forecasts appear not to be affected by manager’s superiority. Regarding sales forecasts, the results are consistent with the assertion that managers impact the quality of the delivered management forecasts. Regarding EPS forecasts, the results are in alignment with Demerjian et al. (2013) who highlight that managerial ability is an ability score related to the entire management team.

Heaping on Dividends: The Role of Dividend Size and Information Uncertainty

In this paper we contribute to a line of literature that examines behavioral biases that impact important corporate decisions. Our paper builds on prior articles that examine heaping or rounding of EPS forecasts. Herrmann and Thomas (2005), Bamber, Hui and Yeung (2010) and Dechow and You (2012) observe that firm managers and analysts systematically round EPS forecasts. They also find more rounding for EPS forecasts with larger magnitude, and when management or analysts face higher levels of information uncertainty. In this study we examine whether dividend policy is also affected by rounding and the heaping heuristic. The previous literature that examines heaping related to corporate earnings focuses on heaping in earnings forecasts, however our study focuses on heaping in actual distributed dividends that directly impact key firm characteristics such as firm capital structure, investor returns and overall firm performance. From 1926 through 2015 we report 51.40% of dividends are heaped. In the earlier years, dividends are almost always heaped, but heaping declines through time. In some years 100% of quarterly dividends are heaped. We find heaping is significantly related to dividend size, and the level of information uncertainty faced by firm management. Of the uncertainty metrics, inverted firm size has the strongest relation with the likelihood of heaping. We also observe that heaped dividends are altered less frequently, and when there is a dividend change to a previously heaped dividend it is more often an increase or decrease to another heaped amount.

Investor Overreaction to Analyst Reference Points

ABSTRACTThe author documents analysts' reliance on the company-issued guidance range as a frame of reference in making their EPS forecasts. Analysts who use the guidance range as a reference may limit information diffusion to market participants by keeping their true beliefs private. The author therefore analyzes the stock market's reaction to analyst forecasting decisions, and finds that investors overreact to forecasts that are exactly equal to the minimum or maximum of the guidance range, but do not overreact to other types of forecasts. The evidence presented is most consistent with overreaction driven by overconfident investors who trade too much in the face of information uncertainty.

Explaining Returns through Valuation

This paper develops an analytically coherent yet parsimonious framework which explains market returns in terms of contemporaneous information. It anchors on the idea that valuation (static perspective) can be connected to the dynamics that explains returns, and vice versa. The framework requires two components. First, an explicit function that maps information to an estimate of value—a valuation heuristic. Second, the framework assumes that the difference between a firm’s actual value and value-per-heuristic follows an autoregressive stochastic process with a contraction parameter but no intercept. The contraction parameter can be estimated efficiently and non-parametrically. This modelling suffices to correlate implied returns with realized returns. Using scaled EPS forecasts as valuation heuristics, we empirically evaluate the framework’s validity and robustness. Its explanatory power compares favorably to that of traditional OLS regressions, despite only requiring a single parameter. In a setting with pooled annual data, the implied and realized returns correlations are 73% and 64%, respectively.

The impact of online corporate reporting quality on analyst following and properties of their EPS forecasts

This paper investigates the impact of the quality of online corporate reporting (OCR) by UK listed firms on analyst behavior. Using a proposed new OCR index, we find that higher quality of OCR is related to increased analyst following. Additionally, we find that the main OCR component that drives analyst following is financial information content. However, we find no association between the quality of OCR and properties of analyst EPS forecasts as proxied by error in analyst EPS forecasts, dispersion in analyst EPS forecasts and common uncertainty in analyst information environment. We also investigate the direction of causality between OCR quality and analyst following and find that the later has no impact on the first. Furthermore, we find no evidence that herding behavior by financial analysts in the UK has interrupted the association between the quality of OCR and forecast properties. Our results contribute to the understanding of the role of analysts as information intermediaries in providing information to investors.

Information Asymmetry, Mispricing and Security Issuance

I find that managers avoid (prefer) issuing securities when they perceive their firms to be undervalued (overvalued) based on their superior information. Undervaluation (overvaluation) results in higher (lower) equity and debt growth. However, equity growth is more sensitive than debt growth to mispricing, leading to an increase (decrease) in financial leverage. These effects are pronounced among firms with high information asymmetry and high cash holdings. As a proxy for information asymmetry-driven mispricing, I exploit changes in purchase obligations before disclosure through 10-K filings. Purchase obligations are positively associated with future performance, but are reflected in Tobin's Q and analysts' EPS forecasts only after disclosure.

Existence and Exploitability of Financial Analysts' Informational Leadership

This paper bridges two recent studies on the role of analysts to provide new and relevant information to investors. On the one hand, the contribution of analysts to long-term price discovery on the US market is rather low. Considering earnings per share forecasts as the main output of analysts’ reports, their information share amounts to only 4.6% on average. On the other hand, trading strategies set up on these EPS forecasts are quite profitable. Self-financing portfolios yield excess returns of more than 5% over the S&P 100 index for a time period of 36 years, which is persistent after controlling for the well-known risk factors. In this paper, we discuss the link between the low information shares and the high abnormal returns. We argue that information shares of analysts cannot be higher, because otherwise their forecasts would lead to excessively profitable trading strategies which are very unlikely to persist over such a long period of time.

Managerial Ownership and Earnings Management: Evidence from Stock Ownership Plans

Stock ownership plans initiate stock ownership requirements for executives, but some plans do not require executives to increase their ownership to meet plan requirements. The initiation of ownership requirements, combined with differences between plans in the ownership requirements of executives, provides a novel setting to disentangle the risk and reward effects of managerial ownership on earnings management. Consistent with the risk effect, adoption firms that require an ownership increase exhibit a decrease in the propensity to meet or just beat analyst EPS forecasts following plan adoption. The evidence of a decrease is robust to using adoption firms that require no ownership increase as a control sample, and the results are also robust to using a propensity score matched control sample.

Evaluating XBRL's Impact on the Timeliness and Accuracy of Security Analysts' Next-Year EPS Forecasts

This research uses Detail I/B/E/S data to study the impact of XBRL on the timeliness and accuracy of security analysts' forecasts of firms' next-year EPS. We find that access to XBRL financial statements significantly improves the timeliness of analyst filings post 10-K and 10-Q. Additionally, we find evidence that access to XBRL financial statements helped analysts to reduce the mean absolute error of their next-year EPS forecasts. These findings persist amongst a variety of data specifications. The improvements we find in timeliness and accuracy may hold marked benefits for future financial statement users as data volume and frequency continue to expand.

Are Rankings of Financial Analysts Useful to Investors?

Several institutions issue rankings based on the accuracy of price and EPS forecasts. Given that these rankings are ex-post they may not be able useful to investors. In this paper we show that trading strategies based on perfect foresight and past rankings outperform a passive strategy. In addition, we report that investors are better off following analysts that issue accurate price targets rather that those with accurate EPS forecasts.