The Value Relevance of Management Forecasts and Their Impact on Analysts' Forecasts: Empirical Evidence From Japan

A major financial disclosure feature in Japan is that stock exchanges require firms to provide next year's earnings forecasts. This study investigates the value relevance of Japanese management earnings forecasts and their impact on analysts' earnings forecasts. First, the value relevance of management forecasts is investigated using a valuation framework provided by Ohlson (2001 ), in which firm value is expressed as a function of book value, current earnings and next year's expected earnings. The analysis yields that of the three accounting variables examined, management forecasts have the highest correlation and incremental explanatory power with stock price.
Next, the impact of management forecasts on analysts' forecasts is examined. The results show that more than 90% of changes in analysts' forecasts are explained by management forecasts alone. Further analysis reveals that the heavy dependence of financial analysts on management forecasts in formulating their own forecasts may partially be attributed to the relatively high accuracy of management forecasts. At the same time, financial analysts also somewhat modify management forecasts when certain financial factors indicate that the credibility of management forecasts is in doubt.
Overall, this study presents empirical evidence that Japanese management forecasts provide useful information for the market and have a significant influence on analysts' forecasts.     

Are analysts' cash flow forecasts useful?

This study provides evidence that the cost of equity capital decreases with the number of analysts who issue both cash flow and earnings forecasts (cash analysts). The evidence also shows that cash analysts reduce information asymmetry and predict long‐term earnings more accurately than analysts who issue only earnings forecasts. Taken together, these findings suggest that cash analysts provide market participants with high‐quality information and, as a result, firms benefit from cash analyst coverage in the form of a reduced cost of equity capital.     

Do Analysts Disclose Cash Flow Forecasts with Earnings Estimates when Earnings Quality is Low?

Cash flows are incrementally useful to earnings in security valuation mainly when earnings quality is low. This suggests that when earnings quality decreases, analysts will be more likely to supplement their earnings forecasts with cash flow estimates. Contrary to this prediction, we find that analysts do not disclose cash flow forecasts when the quality of earnings is low. This is because cash flow forecast accuracy depends on the accuracy of the accrual estimates and the precision of accrual forecasts decreases for firms with low quality earnings. Consequently, as earnings quality decreases, cash flow forecasts become increasingly inaccurate compared to earnings estimates. Cash flow estimates that lack reliability are not useful to investors and, consequently, unlikely to be reported by analysts. This result provides an explanation for why analysts are less likely to report cash flow estimates when earnings quality is low.     

The relevance of earnings and cash flows in a heavily regulated industry: Evidence from the Greek banking sector

This study examines the informational quality of annual accounting earnings within Greek banking institutions taking into consideration the most significant risks facing by such firms and specifically interest rate risk, credit risk, liquidity risk and solvency risk, alongside with the persistence of earnings and bank size as significant determinants of ERCs. Data analysis over a period of ten years (1995-2004) revealed that earnings have higher incremental importance in explaining stock return movements compared to cash flows since earnings change has been found to affect stock returns positively. Additionally, interest rate risk has a positive but not significant impact on the return-earnings relation but on the contrary solvency risk, credit risk and liquidity risk proved to have a negative impact on the valuation process for both small and big-sized banks. Finally, tests on the incremental informativeness of cash flows when earnings are transitory provide significant results suggesting that investors seek for alternative measures of banks' performance when earnings are characterized by increased extremity but inversely cash flows and earnings seem to be equally value relevant when investors evaluate big-sized banking institutions. The results are generally robust to the specification of the empirical models and the research design employed in our study.     

The effects of operating cash flow disclosure on earnings comparability,analysts' forecasts,and firms’ investment decisions during the Pre-IFRS era

We examine the effects of the availability of operating cash flow (OCF) information disclosed by firms operating in 15 international countries during the pre-IFRS era on: (1) the comparability of these firms' disaggregated earnings to those of U.S. firms for equity valuation purposes, (2) the properties of analysts' earnings forecasts, and (3) the efficiency of firms' investment decisions. We find that the comparability of disaggregated earnings improves after company-disclosed OCF information is available. We also find decreases in analysts' forecast errors and dispersion and a decrease in firms’ tendency to over- or under-invest when they are predisposed to do so.     

Valuing Loss Firms: What Can Be Learned From Analysts' Forecasts?

Prior research documents an anomalous negative price–earnings relation when a simple earnings capitalization model is estimated for loss‐making firms. Collins et al. (1999 ) suggest that the model is misspecified due to the omission of book value of equity. However, results from previous studies are confusing. We try to enrich prior literature by focusing on analysts' forecasts. In particular, we assess the role of earnings and book value in valuing loss firms using several measures based on the information provided by analysts. We hypothesize that the role of accounting figures depends on whether the loss firm is supported or not by investors. According to this argument, we construct several measures of investor support based on analysts' forecasts, and then test the value relevance of accounting information depending on the degree of support. Our results confirm the usefulness of the notion of ‘investor support’. For those loss firms that are expected to liquidate, we find that the inclusion of book value of equity in the model removes the negative sign on the earnings coefficient. However, for those loss firms that are expected to reverse current losses, we find that the coefficient on earnings remains negative despite the inclusion of book value.     

Earnings quality and corporate cash holdings

Poor earnings quality exacerbates information asymmetry between internal and external stakeholders of a firm. Agency considerations then persuade investors to discount the value of corporate cash holdings out of concern about the inappropriate use of funds. In this study, we show that poor earnings quality has a negative impact on the value of corporate cash holdings and a positive impact on the level of cash reserves. We find that the negative effect of poor earnings quality either neutralizes or more than offsets the positive effect of excess cash on firm value. Our results are robust to several measures of earnings quality and model specifications.     

An empirical investigation of earnings restatements by Australian firms

From 1970 to 2003, we document earnings restatements for the top 500 Australian firms, examine the characteristics of restating firms, and test whether restatements are value relevant. Of the 195 earnings restatements, 49 per cent decrease prior‐period earnings (negative restatements). Negative restatements are relatively larger than positive restatements. We identify three reasons for earnings restatements; namely, accounting policy changes, revision of estimates, and errors and unknown, and they comprise 49, 40 and 11 per cent of the sample, respectively. Restatement firms have higher growth opportunities and are smaller than non‐restating firms from the same industry. Restatements are generally negatively associated with market and non‐market value.     

Industry upheaval and valuation: Empirical evidence from the international oil and gas industry

Accounting literature suggests that contemporaneous earnings are more useful than current operating cash flow in predicting future cash flows and, therefore, also more relevant for company valuation. However, recent research indicates that elevated levels of merger and acquisition activity or a changing economic environment may reduce the value relevance of earnings. Using the oil and gas industry as a case, this paper examines how the oil industry upheaval in the late 1990s influenced the value relevance of financial statement information. We extend the literature by testing for a structural shift in the equity market valuation process. Our results provide evidence of a structural break in the value relevance of accounting information. In contrast to prior research, we find that the value relevance of cash flows actually decreased in the recent oil industry upheaval. On the other hand, the value relevance of book equity increased. Furthermore, we find that accounting-method choice (full cost versus successful efforts) affects the value relevance of accounting information.     

Non-audit services, auditor quality and the value relevance of earnings

This paper tests the hypothesis that there is an inverse relation between non‐audit services (NAS) provided by a firm auditor and the value relevance of earnings (measured as the earnings response coefficient) and that this relation is weaker for firms with Big 6 auditors. The hypothesis is based on anecdotal evidence and previous research that suggests that the provision of NAS by the external auditor is likely to adversely affect investors’ perceptions of the credibility of financial reports, and that Big 6 auditors, because of reputational capital and litigation costs, are likely to mitigate the adverse effects of NAS. Results using 840 firm‐year observations of Australian companies document a statistically significant inverse relationship between NAS and the value relevance of earnings, and this inverse relationship is weaker for Big 6 auditors, therefore supporting the hypothesis.     

会计稳健性对盈余价值相关性的影响研究——基于公允价值计量的视角

以2001～2008年我国A股上市公司为研究样本,基于公允价值计量全面引入的视角,考察了会计稳健性对盈余价值相关性的影响,实证发现:会计稳健性显著降低了会计盈余的价值相关性,而公允价值计量显著弱化了会计稳健性对于盈余价值相关性的负向影响.研究结果表明,对于我国上市公司而言,稳健的会计政策并不意味着高质量的财务报告信息.公允价值与会计稳健性适度藕合,可以弥补会计稳健性的不足,有利于提高会计信息质量.     

Has the IASB Been Successful in Making Accounting Earnings More Useful for Prediction and Valuation? UK Evidence

When producing International Financial Reporting Standards (IFRS), one of the main goals of the International Accounting Standards Board (IASB) was to create a set of standards which were more useful to investors as a predictive tool. We assess the success of the IASB in achieving this goal by investigating the effects of the introduction of IFRS on the relative information content of reported earnings and forecasted earnings under UK generally accepted accounting practices (GAAP) and IFRS. Results indicate that the value relevance of forecasted earnings is significantly lower under IFRS while the value relevance of reported earnings is significantly larger. These findings suggest that IFRS substitutes price‐relevant information previously provided to the market in the form of analyst forecasts with information encoded by companies in their reported earnings. This implies that the IASB was indeed successful in its stated goal and points towards IFRS forecasts being more accurate and less dispersed than UK GAAP forecasts. This, in turn, implies that analysts are able to provide more informative forecasts under IFRS than under pre‐IFRS regimes and that the aforementioned substitution effect is not a consequence of any decrease in the quality of forecasts under the new regime.     

Earnings attributes and investor-protection: International evidence

This study explores the effects of investor-protection on reported earnings quality assessed on the basis of four accounting-based earnings attributes (accruals quality, earnings persistence, earnings predictability, and earnings smoothness). We test the hypothesis that favorable values of each earnings attribute (considered individually) occur in countries whose institutional characteristics provide relatively strong investor-protection. The results based on K-means cluster analysis of institutional characteristics are mixed. Earnings smoothness is less prevalent in strong investor-protection countries, as hypothesized. However both accruals quality and earnings predictability are better in countries whose institutional characteristics are relatively weak. No association is found between investor-protection and earnings persistence, except that countries with low ownership concentration appear to have high earnings persistence. The results based on regression analysis are consistent with those based on the cluster analysis. These results imply that conclusions about the impact of institutional characteristics on earnings quality depend on how earnings quality is measured.     

Macro information environment change and the quality of management earnings forecasts

The 1990s were characterized by substantial increases in the performance of and investor reliance on financial analysts. Because managers possess superior private information and issue forecasts to align investors’ expectations with their own, we predict that managers increased the quality of their earnings forecasts during the 1990s in order to keep pace with the improved forward-looking information provided by financial analysts, upon which investors increasingly relied. Using a sample of 2,437 management earnings forecasts, we document an increase in management earnings forecast precision, management earnings forecast accuracy, and managers’ tendency to explain earnings forecasts in 1993–1996 relative to 1983–1986. Given that these forecast characteristics are linked to greater informativeness and credibility, we also document that the information content of management earnings forecasts, as measured by the strength of share price responses to forecast news, increased in 1993–1996 relative to 1983–1986. As expected, the increased information content of management forecasts primarily occurred for firms covered by financial analysts.