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Article
Publication date: 27 June 2008

H. Young Baek, Dong‐Kyoon Kim and Joung W. Kim

The aim of this paper is to investigate the effect of management earnings forecasts on the level of information asymmetry around subsequent earnings announcement.

Abstract

Purpose

The aim of this paper is to investigate the effect of management earnings forecasts on the level of information asymmetry around subsequent earnings announcement.

Design/methodology/approach

Employing the adverse selection cost method suggested by George et al., the paper compares for each sample firm the adverse selection cost around earnings announcement in forecasting years with that in non‐forecasting years.

Findings

Consistent with Diamond and Verrecchia is the finding that the earnings announcement in non‐forecasting years decreases information asymmetry during a three‐day announcement period and increases in a post‐announcement period up to seven days. No significant change in information asymmetry between pre‐ and post‐announcement periods when firms released a “good” news forecast is found. The firms that previously released a “bad” news forecast experience a significantly lower information asymmetry than those that did not forecast during announcement or post‐announcement days, and experience a decrease in information asymmetry in a five to seven‐day post‐announcement period.

Originality/value

This paper provides the first empirical reports on the different information asymmetry changes around earnings announcements followed by a “good” news management forecast from those followed by a “bad” news forecast.

Details

International Journal of Accounting & Information Management, vol. 16 no. 1
Type: Research Article
ISSN: 1834-7649

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Article
Publication date: 20 August 2021

Max Schreder and Pawel Bilinski

This study aims to evaluate the earnings forecasting models of Hou et al. (J Account Econ, 53:504–526, 2012) and Li and Mohanram (Rev Account Stud, 19:1152–1185, 2014) in…

Abstract

Purpose

This study aims to evaluate the earnings forecasting models of Hou et al. (J Account Econ, 53:504–526, 2012) and Li and Mohanram (Rev Account Stud, 19:1152–1185, 2014) in terms of bias and accuracy and validity of the implied cost of capital (ICC) estimates for a sample of initial public offerings (IPOs).

Design/methodology/approach

The authors use a sample of 1,657 NYSE, Amex and Nasdaq IPOs from 1972 to 2013.

Findings

The models of Hou et al. and Li and Mohanram produce relatively inaccurate and biased earnings forecasts, leading to unreliable ICC estimates, particularly for small and loss-making IPOs that constitute the bulk of new listings. As a remedy, the authors propose a new earnings forecasting model, a combination of Hou et al.’s and Li and Mohanram’s earnings persistence models, and show that it produces more accurate and less biased earnings forecasts and more valid ICC estimates.

Originality/value

The study contributes novel results to the literature on the validity of cross-sectional earnings models in forecasting IPO firm earnings and estimating the ICC. The findings are directly relevant for practitioners, who can improve their earnings forecasting accuracy for IPO firms and related ICC estimates. The insights can be extended to other settings where investors have limited access to financial information, such as acquisitions of private targets.

Details

Accounting Research Journal, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1030-9616

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Book part
Publication date: 14 November 2011

Michael Lacina, B. Brian Lee and Randall Zhaohui Xu

We evaluate the performance of financial analysts versus naïve models in making long-term earnings forecasts. Long-term earnings forecasts are generally defined as third-…

Abstract

We evaluate the performance of financial analysts versus naïve models in making long-term earnings forecasts. Long-term earnings forecasts are generally defined as third-, fourth-, and fifth-year earnings forecasts. We find that for the fourth and fifth years, analysts' forecasts are no more accurate than naïve random walk (RW) forecasts or naïve RW with economic growth forecasts. Furthermore, naïve model forecasts contain a large amount of incremental information over analysts' long-term forecasts in explaining future actual earnings. Tests based on subsamples show that the performance of analysts' long-term forecasts declines relative to naïve model forecasts for firms with high past earnings growth and low analyst coverage. Furthermore, a model that combines a naïve benchmark (last year's earnings) with the analyst long-term earnings growth forecast does not perform better than analysts' forecasts or naïve model forecasts. Our findings suggest that analysts' long-term earnings forecasts should be used with caution by researchers and practitioners. Also, when analysts' earnings forecasts are unavailable, naïve model earnings forecasts may be sufficient for measuring long-term earnings expectations.

Details

Advances in Business and Management Forecasting
Type: Book
ISBN: 978-0-85724-959-3

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Book part
Publication date: 19 September 2014

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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Book part
Publication date: 20 January 2021

Rajib Hasan and Abdullah Shahid

We highlight two mechanisms of limited attention for expert information intermediaries, i.e., analysts, and the effects of such limited attention on the market price…

Abstract

We highlight two mechanisms of limited attention for expert information intermediaries, i.e., analysts, and the effects of such limited attention on the market price discovery process. We approach analysts' limited attention from the perspective of day-to-day arrival of information and processing of tasks. We examine the attention-limiting role of competing tasks (number of earnings announcements and forecasts for portfolio firms) and distracting events (number of earnings announcements for non-portfolio firms) in analysts' forecast accuracy and the effects of such, on the subsequent price discovery process. Our results show that competing tasks worsen analysts' forecast accuracy, and competing task induced limited attention delays the market price adjustment process. On the other hand, distracting events can improve analysts' forecast accuracy and accelerate market price adjustments when such events relate to analysts' portfolio firms through industry memberships.

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Article
Publication date: 26 March 2021

Saarce Elsye Hatane, Jefferson Clarenzo Diandra, Josua Tarigan and Ferry Jie

This study examines the role of intellectual capital disclosure (ICD) on earnings forecasting by analysts in the pharmaceutical industry in emerging countries…

Abstract

Purpose

This study examines the role of intellectual capital disclosure (ICD) on earnings forecasting by analysts in the pharmaceutical industry in emerging countries, particularly in Indonesia, Malaysia and Thailand. This study specifically examines the role of each component of the ICD on analysts' forecasts, which consists of errors of forecasted earnings, the standard deviation of forecasted earnings and analyst recommendations.

Design/methodology/approach

Panel data analysis is conducted using a sample of 17 companies from pharmaceuticals industries in Indonesia, Malaysia, Thailand – Growth Triangle (IMT-GT), which are listed in the Indonesia Stock Exchange (IDX), Malaysia Stock Exchange (MYX) and Stock Exchange of Thailand (SET) from 2010 to 2017. Secondary data is obtained from Bloomberg and Annual report, where they are being analyzed to measure the ICD and gather the control variables.

Findings

The results indicate that the three components of ICD, namely human capital disclosure (HCD), structural capital disclosure (SCD) and relational capital disclosure (RCD), insignificantly influence average analysts' consensus recommendation and analysts' earnings forecast dispersion. However, the findings show a significant negative influence of relational capital disclosure (RCD) on analysts' earnings forecast error. In contrast, HCD and SCD have an insignificant impact.

Practical implications

Transparency in disclosing activities related to external parties is essential for the pharmaceutical industry. It is found that relational capital disclosure is the only ICD indicator that can strengthen analysts' profit predictions. Transparency about company activities in maintaining customer satisfaction and activities related to strategic alliances with other organizations are two critical things that can accommodate the accuracy of earnings forecasting from analysts in pharmaceutical companies.

Originality/value

This study contributes to ICD-related research by discussing the financial analyst's response to this voluntary disclosure in the pharmaceutical industry, particularly in Indonesia, Malaysia and Thailand. The selected observation period is seven years, starting one year after the global financial crisis. The results showed that the disclosure of IC is not an exciting thing for financial analysts. In forecasting current earnings, financial analysts are more interested in errors than the previous year's estimates.

Details

International Journal of Emerging Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-8809

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Article
Publication date: 20 April 2020

Jundong (Jeff) Wang

This paper aims to investigate the association between analyst forecast dispersion and investors’ perceived uncertainty toward earnings.

Abstract

Purpose

This paper aims to investigate the association between analyst forecast dispersion and investors’ perceived uncertainty toward earnings.

Design/methodology/approach

A new measure for investors’ expectations of earnings announcement uncertainty is constructed, using changes in implied volatility of option contracts prior to earnings announcements. Unlike other proxies of uncertainty, this measure isolates the incremental uncertainty regarding the upcoming earnings announcement and is a forward-looking measure.

Findings

Using this new proxy, this paper finds a significant negative correlation between analyst forecast dispersion and investors’ uncertainty regarding the upcoming earnings announcements. Further tests show that this negative correlation is driven by analysts’ private information acquisition rather than analysts; uncertainty toward upcoming earnings announcements. Additional cross-sectional tests show that this negative relationship is more pronounced in the subsample with lower earnings quality.

Social implications

This paper helps to further the understanding of the information content of analyst forecast dispersion, particularly the ways in which they gather and produce private information and their incentives for so doing.

Originality/value

This paper introduces a new market-based and forward-looking proxy of earnings announcement uncertainty that should be useful in future research. This paper also provides original empirical evidence that analysts gather and produce an additional private information to the market when facing noisy signals and that their information reduces investors’ uncertainty toward upcoming earnings announcements.

Details

Review of Accounting and Finance, vol. 19 no. 3
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 19 February 2020

Khawla Hlel, Ines Kahloul and Houssam Bouzgarrou

This paper aims to examine whether International Financial Reporting Standards (IFRS) adoption and corporate governance attributes increase the management earnings

Abstract

Purpose

This paper aims to examine whether International Financial Reporting Standards (IFRS) adoption and corporate governance attributes increase the management earnings forecasts’ accuracy disclosed in prospectuses for French Initial Public Offerings (IPOs).

Design/methodology/approach

The analysis is based on cross-sectional regression explaining the absolute forecast errors by using 45 French firms that made IPOs between 2005 and 2016 in two French financial markets: Euronext and Alternext.

Findings

In agreement with the agency theory and the signaling theory, the authors find that the IFRS adoption and the effective corporate governance, proxied by the board characteristics, increase the accuracy of management forecasts. As a result, this latter gives a credible signal in constructing and sustaining shareholders’ trust on the transparency and the reliability of such financial information.

Research limitations/implications

It is plausible that the limited size of the sample represents a limitation of this study. Another limitation is that no other corporate governance attributes such as board meeting frequency, audit committee measures and ownership structure are used.

Practical implications

Shareholders can take benefit from management forecasts accuracy to structure their investment portfolios efficiently to allocate their funds more effectively and mitigate the costs of adverse selection that they have to face. Furthermore, the authors expect the findings to be interesting to IPO firms, as this study highlights the efficiency of larger and independent boards in decreasing managerial discretion, increasing disclosure quality and supervising management. The results could encourage GAAP-adopters countries to move toward IFRS, as this research reinforces the role of IFRS in enhancing the quality of financial disclosure by offering the required information for shareholders.

Originality/value

This study is important because the potential investors should assess management earnings forecasts accuracy before they consider it when evaluating IPO firms. Also, this paper has some implications for the financial market. It is recommended that future investors pay more attention, when assessing the accuracy of management earnings forecasts, to the accounting regulations of the financial reporting along with the corporate governance mechanisms. Moreover, this study could incite French regulators to revise the AFEP-MEDEF code. Under this code, it could insist that larger and independent boards are more effective in performing their governing roles than smaller boards.

Details

Journal of Financial Reporting and Accounting, vol. 18 no. 2
Type: Research Article
ISSN: 1985-2517

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Article
Publication date: 8 January 2020

Kamran Ahmed, Muhammad Nurul Houqe, John Hillier and Steven Crockett

The purpose of this paper is to determine the properties of analysts’ cash flows from operations (CFO) forecast generated for Australian listed firms as a productive…

Abstract

Purpose

The purpose of this paper is to determine the properties of analysts’ cash flows from operations (CFO) forecast generated for Australian listed firms as a productive activity, within the wider processes of financial disclosure in Australia.

Design/methodology/approach

Two categories of criteria are adopted: first, basic predictive statistical performance relative to a benchmark model and earnings forecasts; and second, relevance for equity pricing, as indicated by the market reaction to cash flow or forecast error reactions. The final sample comprised 2,138 observations between 2001 and 2016 and several regression models are estimated to determine the relative performance and market reaction.

Findings

Analysts’ consensus cash flow forecasts demonstrate poor predictive performance relative to earnings forecasts. Cash flow forecasts are typically naïve extensions of earnings forecasts. Furthermore, cash flow forecasts appear to be of minimal use for equity market participants in complementing earnings forecasts’ role in informing firms’ equity pricing.

Practical implications

While analysts’ earnings forecasts are useful for making predictions, the role of analysts’ cash flow forecasts in capital market functional efficiency appears quite limited.

Originality/value

This study is one of few that examines comparative usefulness of analysts’ earnings and cash flow forecasts and their predictive power using the Australian setting. Additionally, it enriches the sparse international literature on such forecasts.

Details

Accounting Research Journal, vol. 33 no. 1
Type: Research Article
ISSN: 1030-9616

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Article
Publication date: 29 July 2020

Faten Ben Ahmed, Bassem Salhi and Anis Jarboui

The purpose of this study is to present an extension to the research area dealing with the Tunisia initial public offering (IPO) associated earnings management forecasts

Abstract

Purpose

The purpose of this study is to present an extension to the research area dealing with the Tunisia initial public offering (IPO) associated earnings management forecasts, by an examination of the corporate governance mechanisms and earnings forecast accuracy relating impacts.

Design/methodology/approach

The authors use a multiple regression technique (FGLS) to estimate the effect of corporate governance structures and audit quality on earnings forecast accuracy. A sample of 33 IPO companies (165 firm-year observations) collected over the period ranging between 2011 and 2015 was applied.

Findings

The finding of this study reveals that the companies displaying a respectable audit committee size have a significant level of earnings forecast accuracy. Similarly, the accuracy level associated with IPO earnings forecasts is positively influenced by the use of the brand-name auditor.

Research limitations/implications

This study is based on a small sample from a single jurisdiction and limited time period. In fact, the findings examine how financial statements are measured and reported and assess additional regulation to protect investors and understand as well as manage earnings forecast accuracy in IPO prospectuses.

Practical implications

The findings of the study provide some implications for regulators, financial analysts, investors and users of financial statements, particularly who are investigating in potentially IPO firms. This study has an implication for market regulators who suggest that a requirement to publish very detailed forecast information would improve market efficiency by reducing the forecast error.

Originality/value

Previous studies on this subject carried out in other countries with a regulatory framework differ from that of Tunisia, which obligatorily obliges the publication of the forecasts in the prospectus of IPO and capital increase. This is one of the most important studies that simultaneously tests the impacts of corporate governance and audit quality on earnings forecast accuracy in an emerging market, and the results of this study may give strength to Tunisian as well as other developing countries.

Details

Journal of Financial Reporting and Accounting, vol. 19 no. 1
Type: Research Article
ISSN: 1985-2517

Keywords

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