Forecast Dispersion Research Articles

Beta X Forecast Dispersion

Beta X Forecast Dispersion

Hide in the Herd: Macroeconomic Uncertainty and Analyst Forecasts Dispersion

Hide in the Herd: Macroeconomic Uncertainty and Analyst Forecasts Dispersion

Conservatism and stock price informativeness

AbstractThis paper examines how conservative financial reporting influences stock price informativeness, which is defined as the extent to which the current market price reflects future earnings information. Using the accuracy of the future earnings expectations embedded in the current equity price as a measure of stock price informativeness, I find that conservative reporting is positively associated with price informativeness. The results are robust to an alternative stock price informativeness measure, namely, specific return variation or price non‐synchronicity. Furthermore, I also find that a greater positive association between conservatism and stock price informativeness is associated with (1) lower analyst coverage and decreased forecast dispersion, (2) greater bid–ask spreads and greater R&D, and (3) lower financial disclosure quality, supporting the argument that main channel by which conservatism improves stock price informativeness is its impact on the information environment. Overall, the evidence suggests that (1) conservatism improves stock price informativeness by improving the firm's information environment, and (2) the marginal benefit of improvement in stock price informativeness via conservatism is more pronounced in firms with poorer information environments. The results further confirm that conservatism substitutes for information environments in ensuring more accurate equity pricing.

Incongruent CEO Facial Expressions and Analyst Forecast Dispersion

Incongruent CEO Facial Expressions and Analyst Forecast Dispersion

Impact of Integrated Reporting on Information Asymmetry: Evidence from Sri Lanka

Considering the dearth of empirical evidence on the impact of integrated reporting (IR) on information asymmetry in developing countries, this paper investigates the impact of IR on information asymmetry in Sri Lanka. A paired sample t-test and a panel regression analysis are employed to draw empirical evidence. Information asymmetry is proxied by earnings forecast error, earnings forecast dispersion, and cost of equity capital, whereas firms' IR level is measured using the IR framework. Findings indicate a significant reduction in information asymmetry upon adopting IR. Further, they reveal that the level of IR has a feeble but statistically significant negative impact on the cost of equity capital. Earnings forecast error and forecast dispersion do not indicate significant associations with IR levels. Given the substantial cross-country differences, this paper offers a better understanding of the impact of IR on information asymmetry from a developing country setting where the adoption of IR is voluntary.

Shaping the Information Environment: International Evidence on Financial Reporting Frequency and Analysts’ Earnings Forecast Errors

This article investigates the role of mandatory interim financial reporting in financial analysts’ annual earnings forecast errors. We provide large-scale evidence from 49 countries that a mandatory quarterly (as compared to semi-annual) reporting regime is associated with lower analysts’ annual earnings forecast errors. This conjecture is further supported when we exploit an exogeneous change in the mandatory frequency regime from a semi-annual to a quarterly reporting mandate in Japan. Consistent with an improvement in the information environment, our findings are more pronounced for firms and analysts subject to higher information acquisition costs and in countries where the institutional setting is less able to meet analysts’ information needs. We corroborate this conjecture by documenting that more frequent mandatory reporting decreases analysts’ forecast dispersion and improves the profitability of their stock recommendations. Overall, our findings extend the research on the role of the institutional setting in analysts’ output, suggesting that the mandate of more frequent reporting improves analysts’ forecasting process.

The spillover effect of economic policy uncertainty: Evidence from analyst behaviors in Hong Kong

This paper examines the spillover effect of economic policy uncertainty on the financial market by comparing how local and external policy uncertainties affect the behaviors of analysts in an international financial center. Unlike findings in the United States and the United Kingdom, high local policy uncertainty does not significantly decrease analysts’ earnings forecast accuracy or exacerbate forecast dispersion in Hong Kong. In contrast, high external policy uncertainty from Mainland China, the U.S., Europe, and across the globe significantly decrease analysts’ forecast accuracy in Hong Kong, although these external policy uncertainties have also no significant effect on forecast dispersion. In addition, both local and external policy uncertainties have significant impact on analyst coverage and recommendations. These results provide strong evidence on the cross-country spillover effect of economic policy uncertainty on a developed and international financial market.

The impact of key audit matter reporting on analyst forecast accuracy and forecast dispersion: evidence from Chinese listed firms

PurposeThe purpose of this study is to investigate the decision usefulness of key audit matters (KAMs) disclosures from the perspective of financial analysts.Design/methodology/approachUsing data from two groups of Chinese-listed firms subject to different audit standards, the authors use a quasi-natural experiment and the difference-in-differences approach to examine the impact of KAMs on analyst forecasts. The authors also conduct a textual analysis on management disclosures as well as on the content of KAM disclosures.FindingsThe results of this study show that both forecast errors and dispersion have significantly declined for the firms disclosing KAMs compared to the firms without such disclosures. Further analysis presents evidence that KAM disclosures have resulted in simultaneous increase in management disclosures and audit quality. In addition, auditor characteristics, such as auditor’s dependence on client fees and its industry specialization, and firm’s characteristics, such as its ownership structure and its social connection with the auditor, appear to affect the informativeness of KAM disclosures. The authors also perform content analysis of KAMs to provide additional insight.Research limitations/implicationsAs AH firms are required to adopt the expanded audit report one year before A shares firms, by design, there is only one year in which these two types of companies differ. Therefore, the results without overgeneralizing the impact of KAM disclosures should be interpreted. In addition, this study involves the Chinese market alone and, therefore, may be affected by factors peculiar to the functioning of the Chinese economy and financial markets.Originality/valueThe main contribution of this study lies in highlighting the salience of KAM context in shaping the relationship between auditors, managers and analysts and its collective impact on information environment. The findings of this study are significant in that they help establish the importance of KAM disclosures in helping to assure that higher quality financial information is available to capital markets, as well as information that is otherwise unavailable given disclosure mandates in China. This study adds to the literature on the importance of providing additional means of safeguarding auditor independence and on the value of auditor expertise in providing useful content in audit disclosures. Moreover, the findings suggest that the expanded audit report can help reduce the level of asymmetric information, especially for state-owned entities. They provide insight on how the new audit rule influences managers and auditors communicating complex accounting matters as well as the moderating effect of the social connections between auditors and firm executives.

The value of the PCAOB’s international audit oversight on U.S. listed foreign companies: Evidence from an initial enforcement breakdown

Using, as a natural experiment, the Public Company Accounting Oversight Board’s May 18, 2010, release stating that its oversight of certain foreign auditors had been denied, we examine investors’ early valuation of the PCAOB’s international audit oversight on U.S.-listed foreign companies. Comparing reactions for the release-exposed U.S.-listed foreign companies to reactions for other U.S.-listed foreign companies, we find a significant decline in the share values of the release-exposed companies. The decline is driven by companies with auditors from China; the on-list companies from the 19 on-list European jurisdictions do not experience significantly negative stock market reactions. Using difference-in-differences analyses of earnings response coefficients, abnormal stock returns and trading volumes surrounding earnings announcements, and analyst forecast dispersions, we find a decline in perceived financial reporting quality for the release-exposed foreign listings from China but not for the release-exposed companies from the 19 European jurisdictions—a finding in line with the results of the stock market reaction analyses. These results are consistent with the view that the PCAOB’s international inspection would create a net value for U.S.-listed companies from China.

Financial derivatives, analyst forecasts, and stock price synchronicity: Evidence from an emerging market

Against the backdrop of the role of financial derivatives in the recent financial crisis, this paper aims to identify the effects of financial derivative usage on the amount of firm-specific information incorporated into stock prices, as measured by stock price synchronicity (SPS), using an emerging market from 2009 to 2019. We find strong evidence consistent with this information asymmetry view. Specifically, our results exhibit that financial derivative usage deters firm-specific information into stock prices, thus increasing SPS. Further analyses indicate that financial derivative usage indirectly affects SPS via analyst forecasts (i.e., analyst forecast accuracy, analyst forecast dispersion, analyst forecast optimism, and analyst following). In addition, our results imply that both the economic complexity and accounting complexity of financial derivatives affect SPS positively. The results are robust to a batch of robustness tests. The findings not only add to the literature on financial derivative usage and SPS but also have policymaking implications for the emerging market.

Managing disclosure of political risk: The case of socially responsible firms

Based on agency theory, signaling theory, and moral capital theory, we examine whether and how corporate social responsibility (CSR) performance influences firms’ political risk disclosure. We also examine the impact of such disclosure on institutional ownership and financial analysts’ forecast dispersion and forecast error and whether the impact depends on CSR performance. We find that stronger CSR performers provide less disclosure of political risk than weaker CSR performers, suggesting that CSR performance is a substitute for political risk disclosure. We find that political risk disclosure is associated with lower percentage of ownership by institutional investors with long-term investment horizons and higher analyst forecast dispersion and forecast error. However, we find that CSR performance cancels out the negative impact of political risk disclosure on institutional ownership and analyst forecast dispersion/error, suggesting that institutional investors and financial analysts put less weight on such disclosure issued by more CSR-oriented firms.

Filling in the GAAPs in Individual Analysts’ Street Earnings Forecasts

Analysts’ street earnings forecasts are sometimes based on GAAP earnings and sometimes based on non-GAAP earnings, which exclude various GAAP earnings components. Therefore, differences in analysts’ street earnings forecasts may capture differences in not only expected performance but also the earnings metric forecasted. We argue that analysts who forecast non-GAAP, rather than GAAP, street earnings are more likely to separately analyze earnings components. Consistent with this argument, we find that analysts who forecast non-GAAP street earnings issue relatively more accurate forecasts. We also argue that excluded earnings components often reflect negative transitory items, and that variation across analysts in the earnings metric forecasted suggests that the negative excluded items are forecasted by only a subset of analysts. Consistent with this assertion, we find that variation across analysts in the earnings metric forecasted is associated with a lower consensus GAAP earnings surprise and lower stock returns around the earnings announcement. Finally, although variation in the earnings metric forecasted is a source of analyst forecast dispersion, we find that it is also incrementally associated with a lower earnings response coefficient, consistent with the existence of transitory items. We therefore find that the variation in the earnings metric forecasted is an important source of analyst forecast dispersion that predicts not only a lower earnings surprise but also a lower earnings response. This paper was accepted by Brian Bushee, accounting. Funding: Financial support from the Gatton College of Business & Economics, the KPMG Fellowship at the Mendoza College of Business, and the Goizueta Business School is gratefully acknowledged. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2022.4553 .

COVID-19 pandemic, limited attention, and analyst forecast dispersion

This paper investigates the effect of the COVID-19 pandemic on analysts’ forecast dispersion. We find that analysts’ exposure to the COVID-19 lockdown reduces the dispersion of their forecasts. Along with the forecast dispersion, the number of earnings forecasts issued by treated analysts decreases, supporting the channel of attention distraction. Moreover, there is no significant difference between optimistic and pessimistic forecasts, against the explanation of risk attitude change. We find our conclusion is robust to a staggered DID model and numerous robustness tests. Our finding contributes to the dispute regarding the pandemic's effect on analyst forecast behavior.

The Effect of Organizers on Analysts’ Forecasts: Evidence from Conference Calls in China

ABSTRACT We inspect the impact of conference call organizers on the quality of analysts’ forecasts. Organizers affect the information delivery through conference calls with the composition of audiences, the preparation of managers, and the frame of questions. Using manually collected information of conference calls in China, we discover that conference calls refine analysts’ forecast quality. Further evidence indicates that brokerage firms, as the organizer of the call, significantly improve analysts’ forecast quality. Specifically, brokerage firms show a positive relationship with forecast accuracy and a negative relationship with forecast dispersion. However, neither top brokerages nor star analysts show a distinct advantage in delivering information when they act as the organizer and the host.

Forecasting earnings with combination of analyst forecasts

We propose a regression-based method for combining analyst forecasts to improve forecasting efficiency. This method significantly reduces the bias in earnings forecasts, and generates forecasts that consistently outperform consensus forecasts over time and across firms of different characteristics. Incorporating firm-level and macroeconomic information in the model further improves earnings forecasting performance. Forecasting gains increase with the dispersion and bias of analyst forecasts, and the degree of under/overreactions to earnings news. Moreover, the combination forecast produces larger earnings response coefficients, weakens the anomaly of post-earnings-announcement drift, and provides a better expected profitability measure that has higher power to predict stock returns.

Firm-specific or market-wide information: How does analyst coverage influence stock price synchronicity?

This study shows that analysts generate firm-specific information, rather than market-wide information. Whereas previous studies report only the positive relationship between stock price synchronicity and analyst coverage, we suggest that the positive relation can be attributed to the interaction between analyst coverage and firm performance cyclicality. After controlling for the interaction effect between the analyst coverage and cyclicality, synchronicity decreases with the analyst coverage. Both effects diminish with the high analyst forecast dispersion, namely, we observe the decreasing effect of increasing analyst coverage on synchronicity and the increasing effect of interaction between analyst coverage and cyclicality.

Is silence golden sometimes? Management guidance withdrawals during the COVID-19 pandemic

The many management guidance withdrawals during the COVID-19 pandemic have attracted considerable attention from the media, investors, and regulators. This study analyzes the determinants and consequences of these withdrawals. We find that guidance withdrawals are due to economic uncertainty, resulting from firms’ exposure to the COVID-19 pandemic rather than poor financial performance. Also, the effect of COVID-19 exposure on guidance withdrawals is stronger when firms face higher litigation risk. Further, guidance withdrawals result in abnormally large trading volumes and high analyst forecast dispersion but do not harm stock prices or the level of analyst earnings forecasts. Overall we believe the findings have implications for understanding corporate disclosure practices during periods with heightened economic uncertainty.

Hard to arbitrage, hard for analysts to forecast

This paper examines whether limits to arbitrage (LA) affect analysts' earnings forecast accuracy. Using the LA index, which is constructed from unique trading constraints in the Chinese stock market and other commonly used measures, we find that forecast accuracy is much lower for stocks with high LA. Moreover, our results are more suited to explanations of cognitive bias that turn to investor sentiment or limited attention and cannot be fully explained by more objective factors, including analyst ability, broker size, broker experience, and commission pressure. We also find that LA amplifies analyst forecast dispersion. Such results indicate that LA distorts analysts’ earnings expectations and provides new insight into how LA affects anomaly returns.

Disagreement in economic forecasts and equity returns: risk or mispricing?

PurposeThis paper investigates the role of economic disagreement in the cross-sectional pricing of individual stocks. Economic disagreement is quantified with ex ante measures of cross-sectional dispersion in economic forecasts from the Survey of Professional Forecasters (SPF), determining the degree of disagreement among professional forecasters over changes in economic fundamentals.Design/methodology/approachThe authors introduce a broad index of economic disagreement based on the innovations in the cross-sectional dispersion of economic forecasts for output, inflation and unemployment so that the index is a shock measure that captures different aspects of disagreement over economic fundamentals and also reflects unexpected news or surprise about the state of the aggregate economy. After building the broad index of economic disagreement, the authors test out-of-sample performance of the index in predicting the cross-sectional variation in future stock returns.FindingsUnivariate portfolio analyses indicate that decile portfolios that are long in stocks with the lowest disagreement beta and short in stocks with the highest disagreement beta yield a risk-adjusted annual return of 7.2%. The results remain robust after controlling for well-known pricing effects. The results are consistent with a preference-based explanation that ambiguity-averse investors demand extra compensation to hold stocks with high disagreement risk and the investors are willing to pay high prices for stocks with large hedging benefits. The results also support the mispricing hypothesis that the high disagreement beta provides an indirect way to measure dispersed opinion and overpricing.Originality/valueMost literature measures disagreement about individual stocks with the standard deviation of earnings forecasts made by financial analysts and examines the cross-sectional relation between this measure and individual stock returns. Unlike prior studies, the authors focus on disagreement about the economy instead of disagreement about earnings growth. The authors' argument is that disagreement about the economy is a major factor that would explain disagreement about stock fundamentals. The authors find that disagreement in economic forecasts does indeed have a significant impact on the cross-sectional pricing of individual stocks.

Performance Feedback and Strategic Change: The Effects of Analyst Coverage and Forecast Dispersion

This study employs the behavioral theory of the firm and the attention-based view to examine the connection between performance feedback and strategic change in the external monitoring mechanism extracted from stock analysts. Based on a sample of Taiwanese electronic firms from 2001 to 2020, we first found that firms tend to search for alternative strategic options when facing below-aspiration performance. Next, analyst coverage and forecast dispersion, as sources for revising the attention structure of decision-makers, become the contingencies for explaining this connection. However, we also found that firms avoid strategic change when experiencing above-aspiration performance and the contingent roles become neutralized in this scenario.