Analysts’ Use of Nonfinancial Information Disclosures*

In this study I examine how analysts process nonfinancial information and how this is affected by the patterns of firms’ nonfinancial information disclosures. More specifically, I examine the association between analyst earnings forecast errors and the persistence of nonfinancial disclosures, both across information content and over time. The study focuses on firms in the wireless industry for the period 1997–2007. The results show that analysts tend to underreact to the information contained in customer acquisition cost, average revenue per user, and the number of subscribers. These are the performance measures that have significant predictive ability for future earnings of wireless firms. Distinguishing between firms on the basis of their nonfinancial disclosure patterns reveals that the above findings are driven primarily by firms with irregular disclosures. There is no evidence of analysts’ inefficiency in evaluating the content of nonfinancial metrics provided by persistently disclosing firms. This implies that the lack of systematic disclosures of performance measures restricts financial analysts’ ability to fully analyze the contributions of these metrics for future earnings.     

An Empirical Examination of the Divergence between Managers’ and Analysts’ Earnings Forecasts

We study circumstances when analysts’ forecasts diverge from managers’ forecasts after management guidance, and the consequences of this divergence for investors and analysts. Our results show that investors’ return response to earnings surprises based on analyst forecasts is significantly weaker when analyst and management forecasts diverge, and that this attenuating effect is stronger when the management forecast is more credible. When the divergent management forecast is more accurate than the analyst consensus forecast, the subsequent‐quarter analyst consensus forecast is significantly more accurate than that of the current quarter, and exhibits less serial correlation. Overall, our findings suggest that, when analyst and management forecasts diverge, investors find the two sources to contain complementary information, and analysts learn to improve their subsequent forecasts.     

Credit Rating Agency and Equity Analysts’ Adjustments to GAAP Earnings

Moody's analysts and sell‐side equity analysts adjust GAAP earnings as part of their research. We show that adjusted earnings definitions of Moody's analysts are significantly lower than those of equity analysts when companies exhibit higher downside risk, as measured by volatility in idiosyncratic stock returns, volatility in negative market returns, poor earnings, and loss status. Relative to the adjusted earnings definitions of equity analysts, adjusted earnings definitions of Moody's analysts better predict future bankruptcies, yet they fare significantly worse in predicting future earnings and operating cash flows. These findings persist after controlling for optimism incentives of analysts, reporting incentives of companies, credit rating levels, and industry and year effects. Our findings suggest that credit rating agencies cater to their clients’ demand for a more conservative interpretation of company‐reported performance than what is offered by equity analysts.     

When Do Analysts Adjust for Biases in Management Guidance? Effects of Guidance Track Record and Analysts’ Incentives

Prior research indicates that analysts do not fully adjust for the general downward bias in earnings guidance issued by management. We report the results of two experiments designed to investigate how guidance track record and analysts’ incentives jointly explain the extent to which analysts adjust for guidance bias. Our results suggest that analysts with accuracy incentives adjust for management’s track record of downwardly biased guidance when the bias is relatively small (one cent), but those with relationship incentives do not. Furthermore, the difference in adjustment is larger when the bias track record is inconsistent than when it is consistent. Also, when guidance bias is larger (two cents) relative to smaller (one cent), analysts with relationship incentives partially adjust, as they appear to strike a balance between accuracy and their desire to please management. These findings hold implications for investors, regulators, and the interpretation of prior research.     

Mortgages and Financial Expectations: A Household-Level Analysis

We contribute to the literature on household mortgage debt by exploring one particular influence on mortgage debt at the household level, namely the financial expectations of the individuals within the household. Our theoretical model predicts a positive association between the quantity of mortgage debt and optimistic financial expectations. Our empirical findings based on household level data provide convincing support for our theoretical priors in that optimistic financial expectations are positively associated with the level of outstanding mortgage debt.     

Significance of Forecast Precision: The Importance of Investors’ Expectations

I investigate whether the alignment between individual investors’ expectations about forecast precision and actual forecast precision affects their estimates of firm value, and whether this relationship is mediated by individual investors’ perceptions of management credibility and future firm growth. Experimental results confirm that when expected and actual forecast precision align, individual investors estimate higher firm stock prices than when expected and actual forecast precision do not align. I also provide evidence of a mediation path through which the misalignment between expected and actual forecast precision affects individual investors’ perceptions of management credibility, future firm growth, and estimates of firm stock price. My findings help reconcile inconsistencies in prior earnings forecast literature and inform managers and researchers about strategies that lead to higher perceptions of management credibility and firm value.     

Mandatory IFRS Adoption and Financial Statement Comparability

This study examines whether mandatory adoption of International Financial Reporting Standards (IFRS) leads to capital market benefits through enhanced financial statement comparability. U.K. domestic standards are considered very similar to IFRS, suggesting any capital market benefits observed for U.K.‐domiciled firms are more likely attributable to improvements in comparability (i.e., better precision of across‐firm information) than to changes in information quality specific to the firm (i.e., core information quality). If IFRS adoption improves financial statement comparability, we predict this should reduce insiders' ability to benefit from private information. Consistent with these expectations, we find that abnormal returns to insider purchases ― used to proxy for private information ― are reduced following IFRS adoption. Similar results obtain across numerous subsamples and proxies used to isolate IFRS effects attributable to comparability. Together, the findings are consistent with mandatory IFRS adoption improving comparability and thus leading to capital market benefits by reducing insiders' ability to exploit private information.     

Relative Effects of IFRS Adoption and IFRS Convergence on Financial Statement Comparability

One of the primary objectives of both adoption of IFRS and convergence between IFRS and U.S. GAAP is to increase financial statement comparability. Using a unique setting in Germany, we compare the effectiveness of these two approaches in achieving this desired outcome. Our empirical tests show that both adoption and convergence lead to an increase in comparability after the new enforcement regulation in 2005. However, difference‐in‐differences tests show that adoption does not lead to a significant incremental increase in comparability beyond convergence. The findings of this study should be of interest to regulators and standard setters as they assess alternative methods of aligning domestic standards with IFRS.     

个人财务报表:功用与设计

个人财务报表是个人资产变动的信息载体.它不仅是个人进行资产运营的依据,也能为一国精准化调控政策的制定、交易对手的微观化、个人破产法的建立、个人所得税法的改革、家庭关系的协调甚至是腐败的监测预防提供信息依据.个人财务报表的设计既要反映与企业财务报表的异同,也要反映其与家庭财务报表的勾稽关系,还要反映其自身功能的有效实现.个人财务报表可以通过立法、行政承诺与多形态自愿参与等多个层次在现实中逐步实施.     

Financial Statement Comparability and the Efficiency of Acquisition Decisions

This study examines whether acquirers make better acquisition decisions when target firms’ financial statements exhibit greater comparability with industry peer firms. We predict and find that acquirers make more profitable acquisition decisions when target firms’ financial statements are more comparable—as evidenced by higher merger announcement returns, higher acquisition synergies, and better future operating performance. We also find that post‐acquisition goodwill impairments and post‐acquisition divestitures are less likely when target firms’ financial statements are more comparable. Finally, we find that acquirers benefit most from comparability when acquirers’ ex ante information asymmetry is higher, acquirers operate in volatile operating environments, and management knows relatively less about the target. In total, our evidence suggests targets’ financial statement comparability helps acquirers make better acquisition‐investment decisions and fosters more efficient capital allocation.     

Discussion of “Financial Statement Comparability and the Efficiency of Acquisition Decisions”

Chen, Collins, Kravet, and Mergenthaler (CCKM, 2018 ) is an empirical investigation of whether, after controlling for other known determinants of an acquirer's abnormal stock returns and expected and realized synergies, financial statement comparability impacts the investment decisions surrounding the acquirer's purchase of another company. The primary result is that higher financial statement comparability, as measured by De Franco, Kothari, and Verdi (DKV, 2011 ), yields improvements on outcomes associated with mergers and acquisitions. This discussion presents some criticisms of the DKV measure as applied to this study; the main criticism being whether the DKV measure captures accounting comparability or the risk of the target firm. The empirical results presented in CCKM are consistent with both explanations, thus making it difficult to disentangle CCKM's interpretation from an alternative explanation of their empirical findings.     

Audit Firm Tenure,Bank Complexity,and Financial Reporting Quality

Theory from organizations and economics research posits that in an inter‐organizational relationship, both parties invest in relationship‐specific knowledge, which in turn facilitates the effectiveness of the relationship while strengthening the attachment between the parties. In complex settings where there are more opportunities for knowledge creation, the investments will be larger and the attachment stronger. Because banks are complex institutions that present unique challenges to auditors, we suggest that effective audits critically depend on the accumulation of significant investments in client‐specific expertise through a long association with the client. We find a positive association between audit firm tenure and financial reporting quality, and this association is particularly strong in banks that are more complex. Also, contrary to recent research we find that benefits of audit firm tenure for complex banks accrue even for long tenure and are not limited to medium tenure. Our findings largely support the notion that a long relationship with the client reflects the underlying demand for expertise, which is critical for high‐quality audits of complex organizations. Imposing short‐term limits on audit firms would adversely affect the investments in client‐specific expertise especially in the cases where this expertise is needed the most. Our findings do not support calls for mandatory audit firm rotation for large complex institutions.