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1 – 10 of over 1000To examine whether both the value relevance of accounting information, and the quality of earnings affect financial analysts' revisions of forecast annual earnings per share soon…
Abstract
Purpose
To examine whether both the value relevance of accounting information, and the quality of earnings affect financial analysts' revisions of forecast annual earnings per share soon after an earnings release.
Design/methodology/approach
For firms whose accounting earnings provide either a basis for firm valuation or new information, analysts are predicted to revise earnings forecasts in response to the magnitude of surprise in the earnings release. Using publicly available data, regression analysis explores the influence of earnings response coefficients (ERCs), unexpected earnings, and interactions between ERCs, the association between earnings and returns, and unexpected earnings on forecast revisions after earnings announcements.
Findings
Empirical tests demonstrate a positive relation between the percentage of analysts revising forecasts soon after interim earnings announcements and firm‐specific ERCs, the interaction between the magnitude of earnings surprises, ERCs, and earnings‐returns associations, and pre‐announcement dispersion in forecasts. The results suggest that usefulness of earnings releases is related to the magnitude of new information in the release, the persistence of earnings innovations, the firm‐specific mapping between earnings and returns, and prior uncertainty about earnings.
Research limitations/implications
This paper examines forecast revisions only soon after earnings announcements. Future research should examine more general determinants of analysts' forecast revision activity.
Originality/value
This paper provides evidence about determinants of forecast revision frequency, a measure of how actively financial analysts provide information, an extension of prior research that focuses on analyst following as a measure of information environments.
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Angela Andrews, Pradyot Sen and Jens Stephan
The purpose of this study is to use implied volatilities from exchange traded options to examine the interaction between analysts’ forecast revisions and the market’s perception…
Abstract
Purpose
The purpose of this study is to use implied volatilities from exchange traded options to examine the interaction between analysts’ forecast revisions and the market’s perception of uncertainty about firm value.
Design/methodology/approach
The authors examine how characteristics of individual forecast revisions, e.g. news and changes in dispersion of forecasts, affect changes in implied volatilities, whether analysts use the observable changes in implied volatilities to inform their forecast revisions and whether changes in dispersion of forecasts are correlated with changes in implied volatilities.
Findings
The authors find that good (bad) news forecast revisions reduce (increase) investors’ perception of uncertainty about firm value, analysts do not appear to use changes in implied volatilities to shade their forecast revisions to good/bad news and dispersion of forecasts are a reasonable proxy for uncertainty about firm value as indicated by their correlation with implied volatilities.
Originality/value
Recent research on analysts’ forecast revisions and management forecasts has focused on risk perception rather than value. This paper extends this work with a risk metric based on market transactions in both a short and long window analysis, as well as univariate and multivariate analysis.
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William Forbes, Carel Huijgen and Auke Plantinga
This paper seeks to investigate the usefulness of analysts’ earnings forecast revisions in the allocation of funds to different industries and countries. In particular, it asks…
Abstract
Purpose
This paper seeks to investigate the usefulness of analysts’ earnings forecast revisions in the allocation of funds to different industries and countries. In particular, it asks whether a post analyst revision announcement drift in prices can be exploited to guide an asset allocation strategy based on industry, or country, selection.
Design/methodology/approach
The methodolgy is to use monthly consensus I/B/E/S – First Call analysts’ earnings forecasts for companies listed on the main European stock markets over the period January 1987 to December 2001.
Findings
It is found that a significant post revision announcement effect for individual companies. However, the abnormal returns evaporate away as the research moves from an individual company level to an industry or country level. The paper provides two kinds of evidence which seem to cast doubt on the analysts’ ability to fully incorporate industry and country specific information into their forecasts: returns are driven more by common components than earnings forecast revisions, and company specific news reflected by the revision signal dominates industry or country news.
Originality/value
Locates the origin of stock price momentum strategies in news about earnings reflected in analysts’ forecasts revisions.
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Tony Chieh-Tse Hou, Phillip McKnight and Charlie Weir
The purpose of this paper is to investigate the role of earnings forecast revisions by equity analysts in predicting Canadian stock returns
Abstract
Purpose
The purpose of this paper is to investigate the role of earnings forecast revisions by equity analysts in predicting Canadian stock returns
Design/methodology/approach
The sample covers 420 Canadian firms over the period 1998-2009. It analyses investors’ reactions to 27,271 upward revisions and 32,005 downward revisions of analysts’ forecasts for Canadian quoted companies. To test whether analysts’ earnings forecast revisions affect stock return continuation, forecast revision portfolios similar to Jegadeesh and Titman (2001) are constructed. The paper analyses the returns gained from a trading strategy based on buying the strong upward revisions portfolio and short selling the strong downward revisions portfolio. It also separates the sample into upward and downward revisions.
Findings
The authors find that new information in the form of analyst forecast revisions is not impounded efficiently into stock prices. Significant returns persist for a trading strategy that buys stocks with recent upward revisions and short sells stocks with recent downward revisions. Good news is impounded into stock prices more slowly than bad news. Post-earnings forecast revisions drift is negatively related to analyst coverage. The effect is strongest for stocks with greatest number of upward revisions. The introduction of the better disclosure standards has made the Canadian stock market more efficient.
Originality/value
The paper adds to the limited evidence on the effect of analyst forecast revisions on the returns of Canadian stocks. It sheds light on the importance of analysts’ earnings forecast information and offers support for the investor conservatism and information diffusion hypotheses. It also shows how policy can improve market efficiency.
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François Aubert and Waël Louhichi
The purpose of this paper is to report on research concerning financial analysts’ activity surrounding profit warnings issued by listed companies in the four largest European…
Abstract
Purpose
The purpose of this paper is to report on research concerning financial analysts’ activity surrounding profit warnings issued by listed companies in the four largest European stock exchanges (France, Germany, the Netherlands and the UK). The authors address three aspects of analysts’ forecasts: ex-post accuracy of forecasts, earnings forecast revisions, and consensus forecast dispersion. The goal of the analysis is to study the differences between financial analysts’ behavior within different regulatory settings, namely common law vs civil law countries.
Design/methodology/approach
The sample is composed of 1,330 profit warnings issued by listed European firms during the period 2000-2010. The authors apply event study methodology and OLS regressions to highlight the impact of the legal information environment on analysts’ reactions.
Findings
The empirical analysis reveals that analyst activity depends on each country’s legal context factors, such as the legal information environment of the firm and the index of investor protection. Accordingly, the authors show that both a richer legal information environment and stronger country-level investor protection substantially improve analyst accuracy around profit warnings.
Research limitations/implications
The sample is only composed on firms from four European countries owing to a lack of firms from other European countries that disclosed PW during the period 2000-2010. It would be pertinent to conduct future research dealing with an international sample from different continents.
Practical implications
The paper contributes to a deeper understanding of analysts’ reactions to profit warnings. The findings can influence firms’ reporting practices and lead to future regulation policies.
Originality/value
This work is the first to examine the relationship between profit warning releases and the behavior of financial analysts in a pan-European context where there are different institutional levels of investor protection.
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Ahmed Bouteska and Boutheina Regaieg
The purpose of this paper is to investigate the effect of forecast earnings’ revision on the evolution of securities prices in the Tunisian stock market.
Abstract
Purpose
The purpose of this paper is to investigate the effect of forecast earnings’ revision on the evolution of securities prices in the Tunisian stock market.
Design/methodology/approach
A portfolio study of investor reaction and stock prices following revisions is first conducted to highlight the existence of abnormal return related to analysts’ earnings revisions. Analysis is then supplemented by a second empirical investigation based on the panel data to quantify the effect of revision on the abnormal profitability of securities.
Findings
The evidence found in this paper validates the fundamental theoretical hypothesis according to which the psychological bias resulting from the effect of the forecast earnings revision is related to the abnormal profitability of the securities. The authors conclude the importance of the revision impact on investors’ behavior on one hand, and the informational content of the analysts’ forecasts and the biases which they lead on the other hand.
Originality/value
Globally, the empirical illustrations largely validate the findings of behavioral models particularly that of Kormendi and Lippe (1987), Cornell and Letsman (1989), Beaver et al. (2008) which states that investors under psychological bias, react to the effect of forecast earnings revision by an abnormal variation in stock prices.
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Li‐Chin Jennifer Ho, Chao‐Shin Liu and Jeffrey Tsay
The purpose of this paper is to re‐examine the issue of financial analysts' reaction to enterprise resource planning (ERP) announcements by employing actual firm data and archival…
Abstract
Purpose
The purpose of this paper is to re‐examine the issue of financial analysts' reaction to enterprise resource planning (ERP) announcements by employing actual firm data and archival earnings forecast observations. As an extension of prior ERP studies, this paper also tests whether forecast revisions vary with the timing of adoption.
Design/methodology/approach
Based on 188 firms that announced ERP plans during the years 1993 through 2002, this paper investigates the financial analysts' reaction to ERP announcements by comparing their earnings forecasts issued immediately before and after the ERP announcement. To examine the effect of adoption timing, this paper partitions the sample into three groups: early (1993‐1997), middle (1998‐1999) and late (2000‐2002) adopters.
Findings
Results show that significantly positive revisions occur in longer term forecasts (i.e. three‐year‐ahead forecasts) but not in the shorter term predictions such as one‐ and two‐year‐ahead forecasts. In addition, there is some weak evidence that financial analysts react less positively to middle adopters than to early or late adopters. This finding could be attributed to the fact that many firms adopted ERP systems to work out the Y2K problems during the 1998‐1999 period.
Originality/value
The main finding confirms that financial analysts consider ERP implementations beneficial to the adopters in the long term. Companies contemplating ERP adoption should take this time horizon into account.
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Véronique Bessière and Taoufik Elkemali
This article aims to examine the link between uncertainty and analysts' reaction to earnings announcements for a sample of European firms during the period 1997-2007. In the same…
Abstract
Purpose
This article aims to examine the link between uncertainty and analysts' reaction to earnings announcements for a sample of European firms during the period 1997-2007. In the same way as Daniel et al., the authors posit that overconfidence leads to an overreaction to private information followed by an underreaction when the information becomes public.
Design/methodology/approach
In this study, the authors test analysts' overconfidence through the overreaction preceding a public announcement followed by an underreaction after the announcement. If overconfidence occurs, over- and underreactions should be, respectively, observed before and after the public announcement. If uncertainty boosts overconfidence, the authors predict that these two combined misreactions should be stronger when uncertainty is higher. Uncertainty is defined according to technology intensity, and separate two types of firms: high-tech or low-tech. The authors use a sample of European firms during the period 1997-2007.
Findings
The results support the overconfidence hypothesis. The authors jointly observe the two phenomena of under- and overreaction. Overreaction occurs when the information has not yet been made public and disappears just after public release. The results also show that both effects are more important for the high-tech subsample. For robustness, the authors sort the sample using analyst forecast dispersion as a proxy for uncertainty and obtain similar results. The authors also document that the high-tech stocks crash in 2000-2001 moderated the overconfidence of analysts, which then strongly declined during the post-crash period.
Originality/value
This study offers interesting insights in two ways. First, in the area of financial markets, it provides a test of a major over- and underreaction model and implements it to analysts' reactions through their revisions (versus investors' reactions through stock returns). Second, in a broader way, it deals with the link between uncertainty and biases. The results are consistent with the experimental evidence and extend it to a cross-sectional analysis that reinforces it as pointed out by Kumar.
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Catherine A. Finger and Wayne R. Landsman
This paper provides evidence that will help stock market participants interpret sell‐side analyst buy/sell recommendations. We examine whether recommendation levels (e.g. buy…
Abstract
This paper provides evidence that will help stock market participants interpret sell‐side analyst buy/sell recommendations. We examine whether recommendation levels (e.g. buy) correspond with traditional predictors of the underlying stock's performance, and whether recommendation revisions (e.g. an upgrade) are consistent with news analysts receive. Consistent with theory, we find that more optimistic recommendations are associated with higher mean forecast errors, forecast revisions, and forecasted earnings‐to‐price ratios. However, contrary to expectations, they also have higher market‐to‐book ratios, higher market values, and lower ratios of value to price (Lee et al. 1999). These results are probably driven by specific differences between buys and the less optimistic recommendations, as holds and sells are rarely distinguishable from each other. Our recommendation revision findings are consistent with our expectations. Upgrades have significantly larger earnings forecast errors, earnings forecast revisions, and unexpected earnings growth than do reiterations or downgrades.
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Guoli Chen and Craig Crossland
Financial analysts act as crucial conduits of information between firms and stakeholders. However, comparatively little is known about how these information intermediaries…
Abstract
Financial analysts act as crucial conduits of information between firms and stakeholders. However, comparatively little is known about how these information intermediaries evaluate the believability and importance of corporate disclosures. We argue that a firm’s level of managerial discretion, or latitude of executive action, acts as a cue for financial analysts, which helps them interpret and respond to voluntary management earnings forecasts. Our study provides strong, robust evidence that financial analysts find management forecasts significantly less believable in low-discretion than in high-discretion environments, and therefore tend to be much less responsive to these forecasts. We also show that managerial discretion is especially impactful on analysts’ responses in those circumstances where analysts are typically most uncertain about how to interpret management forecasts.
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