Evaluating the information content of earnings forecasts

This study develops a framework to compare the ability of alternative earnings forecast approaches to capture the market expectation of future earnings. Given prior evidence of analysts’ systematic optimistic bias, we decompose earnings surprises into analysts’ earnings surprises and adjustments based on alternative forecasting models. An equal market response to these two components indicates that the associated earnings forecast is a sufficient estimate of the market expectation of future earnings. To apply our framework, we examine four recent regression-based earnings forecasting models, alongside a simple earnings-based random walk model and analysts’ forecasts. Using the earnings forecasts of the model that satisfies our sufficiency condition, we identify a set of stocks for which the market is unduly pessimistic about future earnings. The investment strategy of buying and holding these stocks generates statistically signi?cant abnormal returns. We offer an explanation as to why this and similar strategies might be successful.     

How Do Different Types of Investors React to New Earnings Information?

Abstract:   The purpose of this study is to investigate how different types of investors react to new earnings information. Using the extremely comprehensive official register of share holdings in Finland, we find that the majority of investors are more likely to sell (buy) stocks in a company after a positive (negative) earnings surprise and that they are biased towards buying after the disclosure of an annual report. Large investors show behaviour opposite to that of the majority of investors. We consider several possible explanations for this heterogeneous investor behaviour, of which differences in investor overconfidence emerges as the strongest candidate.     

Ownership, Investor Protection and Earnings Expectations

Abstract:  This study examines the interactive influence of corporate ownership, corporate governance and investor protection on the incorporation of current value shocks in the accounting earnings of European companies. This influence is investigated not only by means of the association between current news and current earnings but also with respect to the association of the same news with expected future earnings, and its persistence. Consistent with the contractual explanation of accounting conservatism, it is shown that the accounting behaviour examined is a function of the demand created by shareholders, and that the institutional arrangements in force are of lesser significance in the presence of widely held ownership. On the other hand, greater separation between supervision and management and stronger investor protection are seen to be influential under close ownership, as these are shown to curb aggressive accounting in the form of a persistently lower recognition of bad news in earnings. Evidence is also provided that stricter corporate governance practices in Europe can substitute for weaknesses in investor protection provisions in law.     

The Role of the Options Market in the Dissemination of Private Information

Abstract:   This paper examines the role the options market plays in the dissemination of private information. We find abnormal volume in the options market for three days prior to management forecasts, controlling for concurrent equity volume. Classifying trades as long or short, we find more informed options volume relative to equity volume (1) with relatively greater options market liquidity; (2) when equity is listed on the NYSE or AMEX; (3) for larger surprises; (4) with fewer analysts; (5) for shorter times between the forecast and period end; (6) for good news forecasts; and (7) for smaller percentage institutional holdings.     

Analysts' Rationality and Forecast Bias: Evidence from Sales Forecasts

When optimistic forecasts can improve access to management, rational analysts have incentives to issue optimistically-biased forecasts (Lim, 2001). This paper proposes that the extent of this optimistic forecast bias will depend on the forecast's importance to management. If management attaches less importance to a forecasted measure, analysts should decrease their forecast bias because the expected benefits of issuing optimistic forecasts are less. We examine analysts' earnings and sales forecasts, and predict that analysts' optimistic bias will be greater for earnings than for sales. Results are consistent with our predictions and contribute to the evidence that analysts' forecast bias is rational and intentional.     

Does short selling reduce analysts’ optimism bias in earnings forecasts?

We examine the relationship between short selling and analyst optimism bias of earnings forecasts of stocks in China. We propose two possible hypotheses: short selling enhances analysts’ information set to lower optimism bias and analysts drum up optimistic earnings forecasts to counter short selling. Our results suggest that short selling and earnings optimism bias are negatively correlated. The findings are robust to a two-stage least square method, a difference in-differences fixed effect model, an alternative measure of optimism bias, incorporated different time windows to calculate short selling, considered bull and bear market conditions, accounting for media coverage, and using abnormal short selling. By leveraging rich data, we conduct additional analyses using stocks with different forecasting horizons and earnings forecasts that were made after the accounting year but prior to the earnings announcement to further support expanding the information set argument. Lastly, we document that short selling information improves the accuracy of earnings forecasts.     

The effect of self-selection bias on the testing of a stock price reaction to management's earnings forecasts

This study examines the inferential bias due to the failure to control for self-selection when studying the market's reaction to management earnings forecasts. The analysis is conducted by controlling for self-selection and comparing the results to those obtained when self-selection is not controlled. This comparison suggests that the overall inference of a market reaction to the management forecast issuance does not change. However, the statistical significance declines when self-selection is considered. Since the issuance of a management forecast is an obvious self-selection, the results of this study suggest that self-selection should be considered and evaluated in quasi-experimental studies in accounting and finance.     

Does religiosity enhance the quality of management earnings forecasts?

This study investigates whether firms located in areas with higher levels of religiosity disclose higher-quality management earnings forecasts than do other firms. Using a US sample of 4,655 firm-year observations over the period 2001 to 2014, we find that firms headquartered in counties with higher proportions of religious adherents issue earnings forecasts that are less optimistically biased and that the effect of religiosity is concentrated in firms with weak monitoring mechanisms. We also find that religiosity mitigates pessimistic bias in management earnings forecasts, but only for those issued by firms operating in low litigation industries. This result suggests that when the litigation risk is high, both ethicality and risk aversion are at work and their competing effects likely offset each other. Additionally, we document that forecasts issued by firms in more religious areas trigger stronger stock price reactions than those issued by other firms and that the effect is limited to forecasts containing optimistic bias. Overall, our results show that religiosity enhances the quality of management earnings forecasts, but the effect varies based on different conditions.     

从业绩预告违规看中国证券监管的处罚效果

依托中国特殊的强制性业绩预告制度,考察证券监管的处罚行为能否显著降低上市公司发生业绩预告违规的概率。基于2002～2008年年报业绩预告的大样本检验表明,与业绩预告违规有关的处罚或与其他违规有关的处罚都没有发挥降低后续业绩预告违规概率的作用,监管处罚的效果并不理想。     

Do Institutional Investors Enhance Accounting Earnings Attributes in the Korean Market?

This study examines whether the effectiveness of institutional monitoring depends on the economic conditions of emerging capital markets. We use trading volume data by investor type to compute a proxy for total institutional ownership. We then analyze the impact of the proxy variable on accounting earnings attributes and examine whether the association between the two depends on an expectation of market growth. We find that the effect of institutional monitoring decreases when market growth is expected to be low, implying that market growth may be a critical determinant of institutional investors’ long-term monitoring effectiveness in emerging capital markets.     

Analysts' Forecasts and the Broker Relationship

Analysts' ability to forecast earnings per share has been the subject of considerable debate. A concern highlighted in previous research is the agency problem which may arise when analysts have a close working relationship with the firms for which they are providing forecasts. This paper provides evidence that this relationship does not improve the accuracy of the earnings forecasts, but stimulates optimistic forecasts. In addition, the paper examines whether firm size is a factor in forecast accuracy or bias.     

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.     

Over-Reaction by Security Market Analysts: The Impact of Broker Status and Firm Size

The aim of this study is to provide an examination of short-term earnings forecasts for evidence of systematic over-reaction. Analysts' predicted changes in earnings are compared with the realised changes to identify the contribution of systematic error (bias and generalised over-reaction) to the mean square error. A second analysis investigates whether analysts over-react to prior earnings changes. For both analyses, the impact of firm size and analysts' broker status are investigated.     

Abnormal Returns from Predicting Earnings Thresholds

This study examines the performance of a trading strategy based on the prediction of firms concurrently reporting a positive earnings change and meeting analysts’ earnings forecasts. The evidence indicates that a model predicting both earnings thresholds concurrently can yield excess returns that are incremental to predicting only one earnings threshold. Further, I find that the prediction of forecast errors is relatively more important than predicting earnings changes as the incremental benefit from predicting earnings changes concurrently with forecast errors is small relative to a model that predicts only forecast errors. The results hold while controlling for various risk factors and known anomalies.     

Earnings Announcement Lags and Market Responses—Does the Tone of the News and the Market Sentiment Matter?

We investigate earnings announcement lags (period from the end of the reporting period until the announcement date) for the good and the bad quarterly earnings news across different market sentiment periods as well as market reactions thereto. Companies listed on Baltic stock exchanges exhibit clear signs of strategic timing of earnings announcements. Earnings announcement lags for the bad news tend to be longer than those for the good news. This difference is more pronounced during low market sentiment periods. If the release of the bad news is postponed, abnormal return responses remain lower, as expected.