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1 – 10 of over 2000Pamela Fae Kent, Richard Kent and Michael Killey
This study aims to provide insights into US and Australian analysts' views regarding the relative importance of disclosing the direct method (DM) or indirect method (IM) statement…
Abstract
Purpose
This study aims to provide insights into US and Australian analysts' views regarding the relative importance of disclosing the direct method (DM) or indirect method (IM) statement of cash flows and forecasting firm performance.
Design/methodology/approach
Evidence is collected from responses to 104 surveys and 52 interviews completed by US and Australian analysts from 2017 to 2022. The survey and interview questions are developed with reference to the literature.
Findings
US and Australian analysts believe that the DM format provides incremental benefits compared to the IM for (1) confirming the reliability of earnings; (2) improving earnings confidence; (3) more accurate ex ante forecasts of operating cash flow and earnings; and (4) identifying opportunistic accruals manipulation. Analysts view that DM disclosure can lower firm-level cost of equity, although US interviewees more uniformly expect lower costs of equity under DM disclosure when firms yield low earnings quality. DM disclosure is also more important during unstable economic periods, as proxied by COVID-19.
Originality/value
Limited research currently exists regarding disclosure of the DM or IM and its impact on analysts' forecasting accuracy, earnings quality, economic uncertainty and cost of equity. Previous research has relied on archival research to examine differences between the DM and IM methods and are limited by data availability. Our findings are particularly relevant to the US market with few US firms reporting the DM format.
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The recommendation of the analyst report is not only limited to a small number of ratings, but also biased toward a buy opinion with the absence of sell opinion. As an alternative…
Abstract
The recommendation of the analyst report is not only limited to a small number of ratings, but also biased toward a buy opinion with the absence of sell opinion. As an alternative to this, this paper aims to extract analysts' textual opinions embedded in the report body through text analysis and examine the profitability of investment strategies. Analyst opinion about a firm is measured by calculating the frequency of positive and negative words in the report text through the Korean sentiment lexicon for finance (KOSELF). To verify the usefulness of textual opinions, the author constructs a calendar-time based portfolios by the analysts' textual opinion variable of each stock. When opinion level is used, investment strategy has no significant hedged portfolio return. However, hedged portfolio constructed by opinion change shows significant return of 0.117% per day (2.57% per month). In addition, the hedged return increases to 0.163% per day (3.59% per month) when the opening price is used instead of closing price. This study show that the analysts’ opinion extracted from text analysis contains more detailed spectrum than recommendation and investment strategies using them give significant returns.
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This paper offers a way of revivifying classical accounting research in the form of a pragmatist neoclassical programme with a sound epistemological underpinning.
Abstract
Purpose
This paper offers a way of revivifying classical accounting research in the form of a pragmatist neoclassical programme with a sound epistemological underpinning.
Design/methodology/approach
The paper draws on a pragmatist perspective on financial accounting and accounting research springing from John Dewey's theory of inquiry.
Findings
Although a pragmatist underpinning does not entail specific methodological prescriptions, it can provide fruitful insights in research design. The paper discusses the structure and content of a research programme drawing on a pragmatist underpinning and sets out proposals for a practical research agenda. Although the agenda is shaped around the topic of identifiable intangibles, much of the paper has substantially wider relevance.
Research limitations/implications
The approach justifies a revival in scholarly research employing classical methods and directed at improving accounting methods and standards.
Practical implications
The approach would promote closer engagement between scholarly accounting and practitioners such as standard-setters, making some contribution to closing the widely acknowledged gap between research and practice.
Originality/value
The paper offers a neoclassical programme of research drawing considerably more extensively on pragmatist philosophy than did theorisation in the classical period.
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Kyungeun Kwon, Mi Zhou, Tawei Wang, Xu Cheng and Zhilei Qiao
Both the SEC (Securities and Exchange Commission) and the popular press have routinely criticized firms for the complexity of their financial disclosures. This study aims to…
Abstract
Purpose
Both the SEC (Securities and Exchange Commission) and the popular press have routinely criticized firms for the complexity of their financial disclosures. This study aims to investigate how financial analysts respond to the tone complexity of firm disclosures.
Design/methodology/approach
Using approximately 20,000 earnings conference call transcripts of S&P 1,500 firms between 2005 and 2015, the authors first calculate the abnormal negative tone, the measure of tone complexity; then use such tone measure in econometric models to examine analyst forecast behavior. The authors also test the robustness of the results under different model specifications, tone word lists and alternative tone measure calculations.
Findings
Consistent with the notion that analysts respond to the information demand from investors and incur more costs and effort to analyze firm disclosure when the tone is more complex, the authors find that higher tone complexity is positively and significantly associated with more analyst following, longer report duration, more forecast revisions, larger forecast error and larger forecast dispersion. In addition, the authors find that tone complexity has a long-term impact on analyst following but has a limited long-term impact on analyst report duration, analyst revision, forecast error and dispersion.
Originality/value
This study complements existing literature by highlighting the information role of financial analysts and by providing evidence that analysts incorporate the management tone disclosed during conference calls to adjust their forecasting behaviors. The results can be used by policymakers as evidence and support for further improving firm communication from a new dimension of disclosure tone.
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Ruwan Adikaram and Alex Holcomb
In this study, the authors investigate if analysts, as knowledgeable information intermediaries, can correctly identify bank corporate social responsibility (CSR) activities and…
Abstract
Purpose
In this study, the authors investigate if analysts, as knowledgeable information intermediaries, can correctly identify bank corporate social responsibility (CSR) activities and can reliably transmit that information to investors. Hence, the authors specifically explore if analysts perceive and behave differentially in the presence of genuine bank CSR activities (strengths). The authors also analyze if financial markets differentially assess bank CSR strengths. The authors further explore the viability of focusing on analyst and financial markets to validate genuine bank CSR strengths.
Design/methodology/approach
The authors use COMPUSTAT and CRSP for firm and financial data, I/B/E/S for analyst reporting data and MCSI Research KLD for CSR data. The sample consists of 329 distinct banks and 2,525 bank-year observations from 2003 to 2016. The primary CSR score is the total number of CSR strengths less the total number of CSR concerns, across six of the seven dimensions for each firm in each year of the sample (Adjusted CSR Score). In addition, the authors estimate all the analyses with dis-aggregated measures of total CSR strengths and total CSR concerns (Adjusted Total Strength Score).
Findings
The authors find that analysts correctly distinguish and construe bank CSR strengths from CSR concerns. Specifically, bank CSR strengths increase analyst following and forecast accuracy, while decreasing analyst forecast dispersion. The authors further find that bank CSR strengths increase bank market returns. These results are reversed for bank CSR concerns. Additionally, the authors demonstrate that this method using knowledgeable intermediaries can help validate bank CSR strengths.
Research limitations/implications
The sample is limited to US banks and financial markets. The regulatory and information environment is likely to be different from global or emerging markets. However, since banks in many countries aspire to emulate the US banks, these results would be a precursor of banking sectors conditions in emerging markets. Additionally, the availability of data limits the sample to a period that ends in 2016. To the extent that the importance of ESG and CSR concerns has increased in the intervening time, the results may not accurately reflect the current state of the market.
Practical implications
This investigation benefits researchers, customers, banking executives, regulators and activist groups. First, the authors show that in addition to customers, analysts and the financial markets appreciate bank CSR strengths. Second, despite sophisticated financial reporting by banks, analysts correctly distinguish and construe bank CSR strengths. Third, the authors demonstrate a method for bank marketing researchers to validate genuine bank CSR activity, as well as provide additional support for customer related bank CSR outcomes. Fourth, the findings highlight the importance for banks to have high-quality CSR reporting. This might be especially helpful to a bank rebuilding its reputation after a CSR failure. Finally, this investigation using US banks could serve as a precursor for future bank CSR research and help develop CSR reporting guidelines for banks in emerging economies.
Social implications
This investigation benefits researchers, customers, banking executives, regulators and activist groups.
Originality/value
This investigation benefits researchers, customers, banking executives, regulators and activist groups. First, the authors show that in addition to customers, analysts and the financial market appreciates bank CSR strengths. Second, despite sophisticated financial reporting by banks, analysts correctly distinguish and construe bank CSR strengths. Third, the authors demonstrate a method for bank marketing researchers to validate genuine bank CSR activity, as well as provide additional support for customer related bank CSR outcomes. Fourth, the findings highlight the importance for banks to have high-quality CSR reporting. This might be especially helpful to a bank rebuilding its reputation after a CSR failure. Finally, this investigation using US banks could serve as a precursor for future bank CSR research and help develop CSR reporting guidelines for banks in emerging economies.
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Barry Hettler, Justyna Skomra and Arno Forst
Motivated by significant global developments affecting the sell-side industry, in particular a shift toward passive investments and growing regulation, this study examines whether…
Abstract
Purpose
Motivated by significant global developments affecting the sell-side industry, in particular a shift toward passive investments and growing regulation, this study examines whether financial analyst coverage declined over the past decade and if any loss of analyst coverage is associated with a change in forecast accuracy.
Design/methodology/approach
After investigating, and confirming, a general decline in analyst following, the authors calculate the loss of analyst coverage relative to the firm-specific maximum between 2009 and 2013. In multivariate analyses, the authors then examine whether this loss of coverage differs across geographic region, firm size and capital market development, and whether it is associated with consensus analyst accuracy.
Findings
Results indicate that between 2011 and 2021, firm-specific analyst coverage globally declined 17.8%, while the decline in the EU was an even greater, 28.5%. Within the EU, results are most pronounced for small-cap firms. As a consequence of the loss of coverage, the authors observe a global decline in forecast accuracy, with EU small-cap firms and firms domiciled in EU non-developed capital markets faring the worst.
Originality/value
This study is the first to document a concerning global decline in analyst coverage over the past decade. The study results provide broad-based empirical support for anecdotal reports that smaller firms in the EU and those in EU non-developed capital markets bear the brunt of consequences stemming from changes in the sell-side analyst industry.
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Omar Farooq, Harit Satt and Fatimazahra Bendriouch
This paper aims to document the relationship between advertising expenditures and analyst coverage in a sample of Indian firms during the period between 2000 and 2019.
Abstract
Purpose
This paper aims to document the relationship between advertising expenditures and analyst coverage in a sample of Indian firms during the period between 2000 and 2019.
Design/methodology/approach
In order to test the effect of advertising expenditures on the extent of analyst coverage, the authors estimate various versions of pooled ordinary least squares (OLS) regression. The dependent variable (ANALYST) measures the total number of analysts covering a firm in a given year. The main independent variable of interest in this paper represents the advertising activity. The authors define the extent of advertising activity (ADVERT) as the ratio of total advertising expenditures and total assets.
Findings
The study’s results show that advertising expenditures have a significantly positive impact on the extent of analyst coverage and are robust across various proxies of the key variables and various estimation procedures.
Practical implications
There are a number of key takeaways from our study. First, firms that expend more resources on advertising are more likely to be followed by analysts which is associated with better performance, lower information asymmetries associated and high advertising expenditures. Second, stock prices with more information embedded in them may signify that these firms receive more attention from investors and have lower information asymmetries. And finally the impact of advertising on the decision of an analyst to cover a firm becomes more pronounced for firms with high stock price synchronicity. All these three main conclusions are giving investors a clear insight on analyst coverage, advertising expenditure and the link between the two.
Originality/value
The results are consistent with the argument that advertising expenditures induces analysts to cover firms because firms with high advertising activities are more likely to have better performance, lower information asymmetries and increased attention from investors. All of these factors are supposed to facilitate the analyst coverage.
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Financial analysts' roles and incentives mean that they have conflicting identities to maintain towards investors and firm managers. The authors study how analysts adopt various…
Abstract
Purpose
Financial analysts' roles and incentives mean that they have conflicting identities to maintain towards investors and firm managers. The authors study how analysts adopt various politeness strategies in their questioning to establish socially desirable identities in the Q&A of publicly accessible earnings calls.
Design/methodology/approach
The study is based on a sample of US firms with extreme earnings changes. 46 transcripts of end-of-year earnings calls were investigated with the help of linguistic discourse analysis, drawing on frameworks of face and linguistic politeness. For each transcript, the authors identified the structure of the face-threatening acts (FTAs) that arise when analysts ask probing questions and ascertained what specific politeness strategies, if any, are used by analysts to mitigate those FTAs. The authors examine how analysts perform identities through politeness in language and compare analysts' politeness behaviour and identity construction in the increasing earnings sub-sample with the decreasing earnings sub-sample.
Findings
Analysts negotiate different identities according to specific social contexts, promoting their identity as (1) competent professionals when firms report problematic performance by asking questions in a confrontational manner with few politeness strategies and (2) dependents of the firm by asking questions in a more polite manner when firms experience satisfactory performance. Analysts aim to present a socially desirable face in Q&A to influence managers' and investors' perceptions.
Practical implications
The study raises awareness about linguistic politeness as a communication strategy in the Q&A in earnings calls. It thereby enables managers and analysts to use linguistic politeness consciously and strategically and to recognise such use by others.
Originality/value
This study complements existing literature on earnings conference calls as part of external corporate communications by focusing on analysts' use of language when interacting with manages. To the best of our knowledge, this paper is the first to show that politeness underpins analysts' language use as a device for identity negotiations. This is important to understand because analysts' identities vis-a-vis managers and investors is closely related to the stability of the financial system.
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Imen Fredj and Marjene Rabah Gana
This article examines the link between the structure of the board of directors and target price accuracy using a sample of 51 listed firms on the Tunisian Stock Exchange over the…
Abstract
Purpose
This article examines the link between the structure of the board of directors and target price accuracy using a sample of 51 listed firms on the Tunisian Stock Exchange over the period of 2011–2017.
Design/methodology/approach
In this study, the authors used the generalised method of moments (GMM) model to control the endogeneity problem.
Findings
As a result, that model can serve as a signal in the forecasting process. The authors' results suggest that target price accuracy is negatively related to board independence, and dual Chief Executive officer (CEO). In addition, CEO compensation tends to exert a negative impact on target price error.
Practical implications
The authors' findings are valuable for common investors because the findings can be useful in enhancing their capital allocation decisions by assigning higher weights to forecasts issued by firms with strong corporate governance systems. The authors' study also has practical implications for managers and policymakers. Specifically, the evidence provided herein suggests that firms with strong corporate governance mechanisms enhance the accuracy of market expectations, alleviate information asymmetry, and limit market surprises, especially in a context characterised by weak investor protection. The authors' results highlight the advantages of strong corporate governance in improving a firm's information environment and, therefore, are useful for the cost–benefit analysis of improving internal governance mechanisms. Additionally, the authors' results may prove useful to investors who can rely on the information provided by analysts for well-governed companies.
Social implications
The authors' study contributes to the literature in both corporate governance and analysts' forecasts fields. The study provides additional evidence of the benefit of board quality attributes on target price accuracy in an emerging market characterised by high information asymmetry and weak investor protection. The authors' findings exhibit the effectiveness of board attributes in producing better financial information quality in Tunisia. This is useful for investors who may improve their capital allocation decisions by assigning greater weights to target price forecasts of companies with good governance quality, suggesting that good corporate governance is a credible signal of better financial information quality. These results have important implications for capital market regulators and corporate management in encouraging the implementation of good governance practices.
Originality/value
The authors attempted to assess whether corporate governance of listed firms are priced in the Tunisian context characterised by weak governance control and to highlight which mechanism is highly considered by independent financial analysts to build their forecasts.
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This study aims to investigate whether the cash flow forecasts (CFF) of analysts can disseminate valuable information to the information environments of companies.
Abstract
Purpose
This study aims to investigate whether the cash flow forecasts (CFF) of analysts can disseminate valuable information to the information environments of companies.
Design/methodology/approach
The author uses empirical archival methodology to conduct differences-in-difference analyses.
Findings
It is found that information asymmetry decreases in the treatment group following the initiation of CFF during the postperiod, which is consistent with the hypothesis of this paper.
Originality/value
To the best of the author’s knowledge, this study is the first among the cash flow forecast studies to demonstrate the usefulness of CFF in the mitigation of information asymmetry, a friction that is widespread in capital markets.
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