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The benefit of labor cost disclosure: evidence from analyst earnings forecast accuracy

Sangwan Kim (Accounting and Finance Department, University of Massachusetts Boston, Boston, Massachusetts, USA)
KoEun Park (Accounting and Finance Department, University of Massachusetts Boston, Boston, Massachusetts, USA)
Joshua Rosett (Claremont McKenna College, Claremont, California, USA)
Yong-Chul Shin (Accounting and Finance Department, University of Massachusetts Boston, Boston, Massachusetts, USA)

Managerial Finance

ISSN: 0307-4358

Article publication date: 8 May 2017

Abstract

Purpose

The purpose of this paper is to investigate whether sell-side equity analysts use labor cost information when forming expectations of future earnings. The availability of disaggregated earnings components will benefit financial statement users to the extent that the additional information released by a firm is useful to infer differential persistence of disaggregated earnings components.

Design/methodology/approach

This paper employs ordinary least squares, logit, and two-stage Heckman (1979) regressions which test whether analysts incorporate labor cost information into their earnings forecasts after controlling for a managerial self-selection to disclose labor costs, and further test whether a firm’s decision to voluntarily disclose labor costs improves analyst forecast accuracy.

Findings

This research finds that analysts incorporate labor cost information into their earnings forecasts after controlling for other earnings components. More importantly, this research shows that voluntary disclosure of labor cost information is positively associated with analyst forecast accuracy. Additional tests show that the benefit of voluntary labor cost information is more pronounced for firms with high information uncertainty and for analysts with less firm-specific experience and analysts affiliated with small brokerage houses.

Originality/value

This paper contributes to the literatures on the effect of labor cost on investors’ behavior and on analyst-specific factors in explaining analyst ability to predict future earnings.

Keywords

Acknowledgements

The authors thank Don Johnson (Editor), an anonymous referee, Robert Kim, Jay Lee, and conference participants at the European Accounting Association Annual Congress for their helpful comments and suggestions.

Citation

Kim, S., Park, K., Rosett, J. and Shin, Y.-C. (2017), "The benefit of labor cost disclosure: evidence from analyst earnings forecast accuracy", Managerial Finance, Vol. 43 No. 5, pp. 510-527. https://doi.org/10.1108/MF-07-2016-0195

Publisher

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Emerald Publishing Limited

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