Investors' Misweighting of Firm-Level Information and the Market's Expectations of Earnings

Prior studies use fundamental earnings forecasts to proxy for the market's expectations of earnings because analyst forecasts are biased and are available for only a subset of firms. We find that as a proxy for market expectations, fundamental forecasts contain systematic measurement errors analogous to those in analysts' biased forecasts. Therefore, these forecasts are not representative of investors' beliefs. The systematic measurement errors from using fundamental forecasts to proxy for market expectations occur because investors misweight the information in many firm-level variables when estimating future earnings, but fundamental forecasts are formed using the historically efficient weights on firm-level variables. Thus, we develop an alternative ex ante proxy for the market's expectations of future earnings (“the implied market forecast”) using the historical (and inefficient) weights, as reflected in stock returns, that the market places on firm-level variables. A trading strategy based on the implied market forecast error, which is measured as the difference between the implied market forecast and the fundamental forecast, generates excess returns of approximately 9 percent per year. These returns cannot be explained by investors' reliance on analysts' biased forecasts. Overall, our results reveal that market expectations differ from both fundamental forecasts and analysts' forecasts.     

Determinants of Managerial Earnings Guidance Prior to Regulation Fair Disclosure and Bias in Analysts' Earnings Forecasts*

Prior to Regulation Fair Disclosure (“Reg FD”), some management privately guided analyst earnings estimates, often through detailed reviews of analysts' earnings models. In this paper I use proprietary survey data from the National Investor Relations Institute to identify firms that reviewed analysts' earnings models prior to Reg FD and those that did not. Under the maintained assumption that firms conducting reviews guided analysts' earnings forecasts, I document firm characteristics associated with the decision to provide private earnings guidance. Then I document the characteristics of “guided” versus “unguided” analyst earnings forecasts. Findings demonstrate an association between several firm characteristics and guidance practices: managers are more likely to review analyst earnings models when the firm's stock is highly followed by analysts and largely held by institutions, when the firm's market‐to‐book ratio is high, and its earnings are important to valuation but hard to predict because its business is complex. A comparison of guided and unguided quarterly forecasts indicates that guided analyst estimates are more accurate, but also more frequently pessimistic. An examination of analysts' annual earnings forecasts over the fiscal year does not distinguish between guidance and no‐guidance firms; both experience a “walk‐down” in annual estimates. To distinguish between guidance and no‐guidance firms, one must examine quarterly earnings news: unguided analysts walk down their annual estimates when the majority of the quarterly earnings news is negative; guided analysts walk down their annual estimates even though the majority of the quarterly earnings news is positive.     

The Relation between Market Values,Earnings Forecasts,and Reported Earnings*

Recently, much of the research into the relation between market values and accounting numbers has used, or at least made reference to, the residual income model (RIM). Two basic types of empirical research have developed. The “historical” type explores the relation between market values and reported accounting numbers, often using the linear dynamics in Ohlson 1995 and Feltham and Ohlson 1995 and 1996. The “forecast” type explores the relation between market value and the present value of the book value of equity, a truncated sequence of residual income forecasts, and an estimate of the terminal value at the truncation date. The analysis in this paper integrates these two approaches. We expand the Feltham and Ohlson 1996 model by including one‐ and two‐period‐ahead residual income forecasts to infer “other” information regarding future revenues from past investments and future growth opportunities. This approach results in a model in which the difference between market value and book value of equity is a function of current residual income, one‐ and two‐period‐ahead residual income, current capital investment, and start‐of‐period operating assets. The existence of both persistence in revenues from current and prior investments and growth in future positive net present value investment opportunities leads us to hypothesize a negative coefficient on the one‐period‐ahead residual income forecast and a positive coefficient on the two‐period‐ahead residual income forecast. Our empirical results strongly support our hypotheses with respect to the forecast coefficients.     

An Approach to Adjusting Analysts' Consensus Forecasts for Selection Bias*

Many recent empirical studies have concluded that analysts' earnings forecasts are optimistic on average. In this paper, we attempt to undo the effect of one potential source of optimistic bias in analysts' earnings forecasts. Assuming forecasts come from a truncated normal distribution, we estimate the “true” population mean using maximum likelihood. We find that our estimates of earnings are more accurate and less biased than standard measures of sample mean and median. However, we do not find a closer relationship between excess market returns and forecast errors from our maximum likelihood estimate than from the sample mean. This may suggest that the market does not fully incorporate analysts' incentives in generating expectations about future earnings.     

外资准入如何影响中国相邻城市间生产率差距？

区域发展不平衡不充分是我国当前面临的社会主要矛盾之一，同时坚持"制度型开放"有助于增强地区间产业关联，带动欠发达地区相关产业发展，进而促进地区间的平衡发展。文章将"开放"和"协调"议题结合，以中国2002年《外商投资产业指导目录》的重新修订作为案例，研究外资准入政策对相邻城市间管制放松行业生产率差距的影响和作用机制。文章结论表明，外资准入政策显著减小了管制放松行业在相邻城市间的生产率差距。异质性检验发现，在中部和西部地区以及较低创新水平、盈利水平和外资进入程度行业的样本组，外资准入政策可以更显著地减小相邻城市间管制放松行业的生产率差距。作用机制检验发现，外资准入政策显著降低了相邻城市间管制放松行业的创新水平差距和盈利水平差距，上述变化是促使减小生产率差距的重要影响渠道。拓展性分析发现，贸易自由化加强了外资准入政策减小相邻城市间管制放松行业生产率差距的积极作用。地区之间的市场分割程度越高，外资准入政策减小管制放松行业生产率差距的作用反而越强。     

The Voluntary Inclusion of Forecasts in the MD&A Section of Annual Reports*

Abstract. In this study, we appeal to theories advanced by Darrough and Stoughton (1990) to enhance our understanding of why some firms may voluntarily include directional forecasts in their annual reports while others do not. The data are consistent with their predictions that a firm's disclosure policy reflects its concern for both financial market valuation and product market competition. We find that for “good news firms, the probability of forecasting is increasing in the financing requirements but decreasing in the threat of competitor entry. The converse holds for “bad news” firms. These results lend further empirical support to the observation that the familiar good news hypothesis tested in the management earnings forecast literature offers only a partial explanation for the decision to forecast. Interestingly, however, even after controlling for financial and product market considerations, an overall voluntary disclosure bias still exists in the data. The data also provide support for the OSC's concern about a voluntary disclosure bias. Only 17.5 percent of our sample forecasts represent revisions downward relative to the previous year's results. However, in contrast to the OSC's concern about a general lack of forward-looking disclosures in annual reports, 35.9 percent of our sample firms include directional forecasts in their MD&A or elsewhere in the annual report.     

Pandemic and employment: Evidence from COVID-19 in South Korea

Using two complementary approaches, this study examines the deterioration of the Korean labor market during the first 10 months of the global COVID-19 pandemic. Applying the synthetic control method, we first find that the COVID-19 outbreak has eliminated 1.1 million jobs (4.2% of nonfarm employment) nationwide in April 2020. However, a difference-in-differences approach shows that local variation in COVID-19 intensity, which captures the “regional” effect of the pandemic, explains only 9% of the national shock. The portion of the regional effect remains low until December. This is mainly because the nationwide fear and policies such as social distancing measures also have a “common” effect on local economies. Our findings suggest that the COVID-19 shock may last long in the labor market due to this common effect unless the risk of infection is completely eliminated.     

Maintaining a Reputation for Consistently Beating Earnings Expectations and the Slippery Slope to Earnings Manipulation

This paper investigates whether maintaining a reputation for consistently beating analysts' earnings expectations can motivate executives to move from “within GAAP” earnings management to “outside of GAAP” earnings manipulation. We analyze firms subject to SEC enforcement actions and find that these firms consistently beat analysts' quarterly earnings forecasts in the three years prior to the manipulation period and continue to do so by smaller “beats” during the manipulation period. We find that manipulating firms beat expectations around 86 percent of the time in the 12 quarters prior to the manipulation period (versus 75 percent for control firms) and that manipulation often ends with a miss in expectations. We document that executives of manipulating firms face strong stock market and CEO pressure to perform. Prior to the manipulation period, these firms have high analyst optimism, growing institutional interest, and high market valuations, along with powerful CEOs. Further, we find that maintaining a reputation for beating expectations is more important than CEO overconfidence and is incremental to CEO equity incentives for explaining manipulation. Our results suggest that pressure to maintain a reputation for beating analysts' expectations can encourage aggressive accounting and, ultimately, earnings manipulation.     

市场化、南北差距及其根源——基于作物性质的政治经济学考察

中国经济发展的区域差异及其根源，一直备受学界关注。其中，市场化发育的区域差异是解释经济发展差距的重要线索。然而，市场发育区域差异的生成根源却未能得到恰当的处理与阐释。文章试图从作物性质的政治经济学维度，构建"政府管制-作物性质-逃避策略"的逻辑框架，探讨区域经济发展差距背后市场发育的决定机理。文章认为，如果将市场化进程视为政府管制放松的过程，那么管制放松就可以区分为主动管制放松与被动管制放松。由可实施逃避策略所决定的被动管制放松及其所触发的市场化进程往往具有不可逆性。由此，逃避策略选择的区域差异性，将导致区域市场化发育程度的不同进而带来经济增长的差异。基于全国1997-2016年面板数据的实证分析表明：由"无政府主义"的作物种植所表达的管制逃避策略，能够显著促进市场化的发育程度；作物种植差异及其所蕴含的种植文化特性，共同决定了南北市场化差异；源于2013年全面开展的农地确权，进一步强化"南强北弱"的管制逃避，导致南北经济差异不断扩大。本研究有助于为中国区域经济增长差异提供新的洞见，从而为缓解不平衡不充分发展问题并推进中国区域经济的协调发展提供政策依据。     

Forecasting oil product market restructuring options in a region

The paper considers alternative forecasts for the regional oil product market of Kurgan oblast. It analyzes the efficiency of the regional oil market restructuring strategy with a view to determining the region’s socioeconomic development prospects.     

Comparison of greenhouse gas emission forecasts in Russia’s energy sector for 2010–2060

A comparative analysis of forecasts of the dynamics of greenhouse gas emissions in the energy sector of the Russian Federation until 2060 is presented. The analysis has been fulfilled within recent years by groups of experts both from Russia and abroad. A database of 71 scenarios has been formed. The “range of disconformity” of the forecasts and the evolution of the forecasting estimates were studied which permitted to evaluate the possibilities of emissions limitation and to find out the configuration of the “solution space”: different combinations of improvement of the energy efficiency, development of low-carbon and carbonless technologies, as well as to reveal the character of the feedback between measures of the emission limitation policy and economic growth.     

A Re-Examination of Financial Analysts' Differential Earnings Forecast Accuracy*

Abstract. This research re-examines whether there are differences in the forecast accuracy of financial analysts through a comparison of their annual earnings per share forecasts. The comparison of analyst forecast accuracy is made on both an ex post (within sample) and an ex ante (out of sample) basis. Early examinations of this issue by Richards (1976), Brown and Rozeff (1980), O'Brien (1987), Coggin and Hunter (1989), O'Brien (1990), and Butler and Lang (1991) were ex post and suggest the absence of analysts who can provide relatively more accurate forecasts over multiple years. Contrary to the results of prior research and consistent with the belief in the popular press, we document that differences do exist in financial analysts' ex post forecast accuracy. We show that the previous studies failed to find differences in forecast accuracy due to inadequate (or no) control for differences in the recency of forecasts issued by the analysts. It has been well documented in the literature that forecast recency is positively related to forecast accuracy (Crichfield, Dyckman, and Lakonishok 1978; O'Brien 1988; Brown 1991). Thus, failure to control for forecast recency may reduce the power of tests, making it difficult to reject the null hypothesis of no differences in forecast accuracy even if they do exist. In our analysis, we control for the differences in recency of analysts' forecasts using two different approaches. First, we use an estimated generalized least squares estimation procedure that captures the recency-induced effects in the residuals of the model. Second, we use a matched-pair design whereby we measure the relative forecast accuracy of an analyst by comparing his/her forecast error to the forecast error of another randomly selected analyst making forecasts for the same firm in the same year on or around the same date. Using both approaches, we find that differential forecast accuracy does exist amongst analysts, especially in samples with minimum forecast horizons of five and 60 trading days. We show that these differences are not attributable to differences in the forecast issuance frequency of the financial analysts. In sum, after controlling for firm, year, forecast recency, and forecast issuance frequency of individual analysts, the analyst effect persists. To validate our findings, we examine whether the differences in the forecast accuracy of financial analysts persist in holdout periods. Analysts were assigned a “superior” (“inferior”) status for a firm-year in the estimation sample using percentile rankings on the distribution of absolute forecast errors for that firm-year. We use estimation samples of one- to four-year duration, and consider two different definitions of analyst forecast superiority. Analysts were classified as firm-specific “superior” if they maintained a “superior” status in every year of the estimation sample. Furthermore, they were classified as industry-specific “superior” if they were deemed firm-specific “superior” with respect to at least two firms and firm-specific “inferior” with respect to no firm in that industry. Using either definition, we find that analysts classified as “superior” in estimation samples generally remain superior in holdout periods. In contrast, we find that analysts identified as “inferior” in estimation samples do not remain inferior in holdout periods. Our results suggest that some analysts' earnings forecasts should be weighted higher than others when formulating composite earnings expectations. This suggestion is predicated on the assumption that capital markets distinguish between analysts who are ex ante superior, and that they utilize this information when formulating stock prices. Our study provides an ex ante framework for identifying those analysts who appear to be superior. When constructing weighted forecasts, a one-year estimation period should be used because we obtain the strongest results of persistence in this case.     

CEO Overconfidence and Management Forecasting

This paper examines how overconfidence affects the properties of management forecasts. Using both the “over‐optimism” and “miscalibration” dimensions of overconfidence to generate our predictions, we examine three research questions. First, we examine whether overconfidence increases the likelihood of issuing a forecast. Second, we examine whether overconfidence increases the amount of optimism in management forecasts. Third, we examine whether overconfidence increases the precision of the forecast. Using both options‐ and press‐based measures to proxy for individual overconfidence, we find support for all three research questions.     

Do community-sanctioned social pressures constrain microenterprise growth? Evidence from a framed field experiment

We conduct a framed lab-in-field experiment to explore the hypothesis that a number of stylized facts about microenterprise behaviour in developing countries – including product market homogeneity and lack of growth and innovation – can be explained by a social institution in which microentrepreneurs share the market to “buy a job.” 280 present or prospective market trader women across four communities in rural Vietnam are anonymously randomized into pairs to play three “market game” treatments. The interactions are framed to simulate real-world retail market competition. The participants compete in an effort task, with performance determining market returns. A highly incentivized individual round allows us to extract a measure of individual “ability” in the effort task. The subjects then compete in successive treatments, where in the final treatment the losing participant in a round can elect to “burn” their competitor’s output, which is framed as the application of social pressure. The behavioural responses are significant and fitting with a theoretical model of the social institution we have in mind: even though subjects are from the same community they are willing to punish (“apply social pressure”), the probability of punishment is increasing in the gap in ability in the pair, and this leads to a decrease in performance from higher-ability individuals. The study provides an example of the use of framed lab experiments to shed light on market behaviour in developing countries, for which full-blown RCTs may face serious feasibility or ethical challenges.     

The impacts of market power on power grid efficiency: Evidence from China

Since 1980s, China has experienced a series of reforms to support the development of electricity industry, and the latest one is in 2015. The essence of this new reform is to improve efficiency and lower energy cost. However, China's electricity market has its particularity. The “provinces as entities” is the main regulation frame in China's electricity sector. The operation of the electricity industry can be seen as a game result and interest compromise between the local government and grid companies, and this “win-win exchange” regulation failure leads to grid market power. The profit mode of the grid enterprises will be gradually changed with the deepening of new electricity reform. How to regulate electricity transmission and distribution sector and improve grid efficiency becomes a crucial problem to address. This paper aims to examine the relationship between market power and power grid efficiency. We calculate the unconditional and conditional efficiency of grid companies by applying a conditional slack-based measure (SBM) model. The empirical results show that grid efficiency is at a low level and the indicators differ among provinces and regions. Moreover, market power indeed has significant negative effects on power grid efficiency. These findings provide some insightful references for the future development of China's power industry and electricity reform.     

A pessimistic view on the impact of regional inequalities

The Chinese government has now to face increasing regional disparities. Despite a high growth rate in the whole country, we may observe a relative failure of the “step ladder strategy”. The expected spillover effects between provinces didn't still exist and it seems that the poorest regions have no protection against risk of fluctuations or shocks. So, my pessimistic opinion is based on the negative effects of regional inequality on efficiency and on equity.     

论新型工业化对泛珠三角工业合作的推动作用

新型工业化是党的“十六大”提出的未来我国经济发展的重要战略部署。走新型工业化道路有助于奠定泛珠三角工业合作的基础,解决泛珠三角工业合作的关键问题,实现泛珠三角工业合作的目的,提高泛珠三角工业合作的水平。     

Employment and labor market dynamics in the Russian Federation until 2030

The paper considers inertial and factor forecasts of the basic parameters of the employment and labor market dynamics in Russia. Estimates of the future state in the area of employment are given for the national and regional levels by types of economic activity. The basic factors acting on the employment and labor market dynamics are also analyzed at the national and regional levels.     

Vertical balanced forecasting of the Ukrainian economy’s GDP

The predicted accuracy of forecasts of Ukraine’s socioeconomic development worked out by its Council of Ministers and research institutions is analyzed. In order to enhance the accuracy of the forecasts, which are currently based primarily on accounting information and expert appraisals, it is proposed to employ an interindustry balance based on the information collected bottom-up: “enterprise — corporations — ministries — Ministry of Economy”.     

Analysis of regional carbon allocation and carbon trading based on net primary productivity in China

Ecological balance and carbon sink economies have gained increased attention for tackling global warming. Based on an improved Carnegie–Ames–Stanford Approach model, this study demonstrated regional Net Primary Productivity (NPP) and analyzed regional carbon overdraft situations in China during 2005–2015. Regional carbon allowances were allocated according to carrying capacity of carbon sequestration and China's carbon intensity reduction goals in “13th Five-year plan”. Data Envelopment Analysis (DEA) technology with panel data was further employed to estimate potential benefits resulting from carbon trading and a carbon sink economy. Regional NPP decreased from south to north and from coast to inland, while regions with severe carbon overdrafts were gathered in North and East China. In order to maintain a regional carbon balance with lower abatement costs, regional cooperation of emission reduction within either North or East China is proposed in this study. It is concluded that the majority of provinces and cities in Eastern China and some provinces in the west would be the major purchasers of carbon credits under a national carbon emissions trading (CET) market. Following the introduction of emissions offset mechanisms, Yunnan, Sichuan, and Heilongjiang would be the major providers of carbon sinks in China.