Management Forecast Consistency

We posit that management forecasts, which are predictable transformations of realized earnings without random errors, are more informative than unbiased forecasts, which manifest small but unpredictable errors, even if biased forecasts are less accurate. Consistent with this intuition, we find that managers who make consistent forecasting errors have a greater ability to influence investor reactions and analyst revisions, even after controlling for the effect of accuracy. This effect is more economically significant and statistically robust than that of forecast accuracy. More sophisticated investors and experienced analysts are found to have a better understanding of the benefits of consistent management forecasts.     

The stock price effects of changes in dispersion of investor beliefs during earnings announcements

Existing research provides competing theories about how dispersion of investor beliefs might affect stock prices. We measure changes in dispersion of investor beliefs around earnings announcements using changes in the dispersion of individual analysts’ forecasts. We find that the 3-day market response to earnings announcements is negatively associated with changes in dispersion, consistent with the cost of capital hypothesis. The results hold after controlling for the current earnings surprise, forecast revisions of future earnings, and reported earnings relative to various earnings thresholds. Our study provides new insight about the information contained in earnings announcements that is incremental to the magnitude and timing of cash flows.     

The disparity between long-term and short-term forecasted earnings growth

We find the disparity between long-term and short-term analyst forecasted earnings growth is a robust predictor of future returns and long-term analyst forecast errors. After adjusting for industry characteristics, stocks whose long-term earnings growth forecasts are far above or far below their implied short-term forecasts for earnings growth have negative and positive subsequent risk-adjusted returns along with downward and upward revisions in long-term forecasted earnings growth, respectively. Additional results indicate that investor inattention toward firm-level changes in long-term earnings growth is responsible for these risk-adjusted returns.     

Do UK Security Analysts Over-react?

Consensus analysts' earnings per share forecasts have become increasingly accessible in recent years and such measures have been widely adopted by academics as proxies for the market's expectations of earnings. Some US studies have suggested that analysts, in revising earnings forecasts, are prone to over-reaction. This study tests for evidence of over-reaction in revisions of the consensus earnings per share forecasts of UK companies reported by the Institutional Brokers Estimate System. For a series of periods, portfolios of companies attracting high and low revisions of earnings forecasts are constructed. We then compare the subsequent earnings forecast of the companies which attracted high revisions in the portfolio formation period with those of the companies which attracted low revisions in the portfolio formation period. We also compare actual changes in annual earnings with forecast changes in annual earnings. Both analyses suggest that UK analysts are prone to under-reaction, a finding which contrasts with the US studies which have identified over-reaction. There is little evidence that the market, in reacting to earnings forecast revisions, fails to recognise this under-reaction.     

Investor sentiment and management earnings forecast bias

This study investigates whether investor sentiment is associated with behavioral bias in managers’ annual earnings forecasts that are generally issued early in the year when uncertainty is relatively high. I provide evidence that management earnings forecast optimism increases with investor sentiment. Furthermore, I find that managers’ annual earnings forecasts are more pessimistic during low‐sentiment periods than during normal‐sentiment periods. Since managers lack incentives to further deflate stock prices during a low‐sentiment period, this evidence indicates that sentiment‐related management earnings forecast bias is likely to be unintentional. In addition, I find that the relationship between management earnings forecast bias and investor sentiment is stronger for firms with higher uncertainty, consistent with investor sentiment having a greater influence on management earnings forecasts when uncertainty is higher.     

Informational role of analyst and investor days

This study empirically clarifies whether analyst and investor days (AI days) affect earnings expectations of participants. The analyses reveal that the tone of the question-and-answer (Q&A) session, rather than that of the management presentation, is positively associated with subsequent revisions of analysts' earnings forecasts. This suggests that such an interactive discussion during a Q&A session plays a key role in affecting analysts' expectations. Furthermore, abnormal returns around the AI days are irrelevant to the tone of the Q&A session. This suggests that AI days mainly provide a partially known (supplemental) information rather than offering new information to analysts and investors.     

THE ASSOCIATION BETWEEN ANALYSTS’ FORECAST REVISIONS AND EARNINGS COMPONENTS: THE EVIDENCE OF FRS 3

This study examines whether the earnings components as required by FRS 3 help UK analysts to predict firms’ earnings changes by investigating the statistical association between analysts’ forecast revisions and firms’ unexpected earnings components. I find that analysts’ forecast revisions made in different time horizons are consistently associated with unexpected earnings components as required by FRS 3. UK analysts are able to incorporate current-year unexpected earnings components into their current and future earnings forecasts even before firms officially release this information. However, empirical results also show that current-year unexpected earnings components are not fully incorporated into analysts’ forecasts of future earnings. Analysts appear to wait for more information releases regarding firms’ future earnings and delay their revisions of future earnings forecasts. This is consistent with the evidence that the cumulative revisions of current earnings forecasts are generally associated with prior-year unexpected earnings components, and the association appears to be stronger as time progresses. Overall, this study provides evidence suggesting that the earnings components as required by FRS 3 help UK analysts to identify firms’ permanent and transitory earnings changes over different forecast horizons. This study also provides strong evidence supporting the informativeness of earnings components for analysts’ forecasts and the information set perspective of FRS 3 that highlights the importance of earnings components in predicting a reporting entity’s future performance.     

Financial Analyst Characteristics and Herding Behavior in Forecasting

This study classifies analysts' earnings forecasts as herding or bold and finds that (1) boldness likelihood increases with the analyst's prior accuracy, brokerage size, and experience and declines with the number of industries the analyst follows, consistent with theory linking boldness with career concerns and ability; (2) bold forecasts are more accurate than herding forecasts; and (3) herding forecast revisions are more strongly associated with analysts' earnings forecast errors (actual earnings—forecast) than are bold forecast revisions. Thus, bold forecasts incorporate analysts' private information more completely and provide more relevant information to investors than herding forecasts.     

The information content of financial analysts' forecasts of earnings: Some evidence on semi-strong inefficiency

The paper assesses the information content of revisions in financial analysts' forecasts of earnings by analyzing the relation between the direction of these revisions and stock price behavior. Abnormal returns during the months surrounding the revisions in analysts' forecasts are computed and evaluated. The results strongly indicate that information on revisions in forecasts of earnings per share is valuable to investors. It is also suggested that market reaction to the disclosure of analysts' forecasts is relatively slow and gives rise to potential abnormal returns to investors who act upon this type of publicly available information.     

The informativeness of analyst forecast revisions and the valuation of R&D-intensive firms

Prior studies (e.g., [McNichols and O’Brien, 1997] and [Diether et al., 2002]) find that analysts are less willing to disclose unfavorable earnings forecasts than to disclose favorable forecasts, and this tendency induces an optimistic bias in disclosed forecasts that increases with the degree of earnings uncertainty. Building on these findings, we predict that, in the context of R&D-intensive industries, there should be differential informativeness and asymmetric valuation roles for upward versus downward analyst forecast revisions. Consistent with our predictions, we find the following evidence: (i) analyst forecast revisions contain a downward bias, causing upward revisions to under-represent, whereas downward revisions to over-represent, changes in true earnings expectations, with the extent of over/under-representation greater for firms with higher R&D expenditures; (ii) upward revisions are associated with more rapid reductions in earnings uncertainties (proxied by forecast dispersions) than downward revisions, mainly for high R&D firms; and (iii) upward revisions are more effective in mitigating the return differentials between high and low R&D firms (as documented in Chan et al., 2001).     

How do financial analysts interpret industrial firms' corporate refocusing announcements?

This study investigates how analysts perceive the effect of corporate refocusing announcements on UK industrial firms' future earnings by examining current-year and one-year-ahead earnings forecast revisions, current-year target price revisions and earnings forecast errors in the five years surrounding a refocusing announcement year. The results reveal that analysts adjust their earnings forecasts downward in a refocusing announcement year and the following two years, predicting that operating performance in the post-refocusing period is likely to decline relative to their former earnings forecasts. Secondly, there is no evidence that analysts issue biased earnings forecasts after refocusing announcements or that their forecasts appear less accurate. Thirdly, they adjust their earnings forecasts downward in a refocusing announcement year with downward market movement. However, they do not similarly adjust their earnings forecast upward with upward market movement. The magnitude of downward adjustments exceeds that of upward adjustments. They also adjust current-year target price forecasts downward with downward market movement in the year prior to a refocusing announcement.     

MANAGEMENT EARNINGS FORECASTS: THEIR USEFULNESS AS A SOURCE OF FIRM-SPECIFIC INFORMATION TO SECURITY ANALYSTS

Although managers frequently release earnings forecasts, little is known about how this information affects investor beliefs. This study compares changes in analyst earnings forecasts following the release of management forecasts: (1) to changes in analyst forecasts of a control sample of nonforecasting firms; and (2) between management forecasts with differing degrees of accuracy. The forecasting error of analyst estimates for firms releasing management forecasts decreases more rapidly than the errors associated with the control firms, which implies that management forecasts are useful. Analysts apparently are capable of determining which management forecasts are most accurate and responding appropriately.     

What Drives Target Price Forecasts and Their Investment Value?

This paper examines the informativeness of analysts’ target price forecasts by relating the investment value of target prices to their primary drivers. Decomposing target price forecasts into near‐term earnings forecasts and price‐to‐earnings ratio forecasts, we show that target price revisions reflect information from both components. In addition, we also find that the relative importance of each component in target price revisions is related to firm characteristics. A portfolio based on target price implied expected returns delivers significant abnormal returns. More importantly, we find that the abnormal returns are associated with both earnings and price‐to‐earnings forecasts, which suggests that the informativeness of target price forecasts comes not only from analysts’ ability to forecast short‐term earnings but also from their ability to assess risk and long‐term growth prospect implied in price‐to‐earnings forecasts.     

Conflicts of Interest and Research Quality of Affiliated Analysts in the German Universal Banking System: Evidence from IPO Underwriting

The quality of equity research by financial analysts is a prerequisite for an efficient capital market. This study investigates the quality of earnings forecasts and stock recommendations for initial public offerings (IPOs) in Germany. The empirical study includes 12,605 earnings forecasts and 6,209 stock recommendations of individual analysts for the time period from 1997 to 2004. The focus of this study is on analysing the potential conflicts of interest that arise when the analyst is affiliated with the underwriter of an IPO. In a universal banking system these conflicts of interest are usually more pronounced and therefore interesting to investigate. The empirical findings for the German financial market suggest that earnings forecasts and stock recommendations of the analysts belonging to the lead-underwriter are on average inaccurate and biased, indicating some conflicts of interest. Moreover, the stock recommendations of the analysts that are affiliated with the lead-underwriter are often too optimistic resulting in a significant long-run underperformance for the investor. In contrast, unaffiliated analysts provide better earnings forecasts and stock recommendations that result in a superior performance for the investor.     

Reputation and Performance Among Security Analysts

Members of the Institutional Investor All-American Research Team supply more accurate earnings forecasts than other analysts when forecasts are matched by the corporation followed and by the date of brokerage house issuance. This contemporaneous advantage is complemented by a timing advantage; All-Americans supply forecasts more often than other analysts. Stocks returns immediately following large upward forecast revisions suggest that All-Americans impact prices more than other analysts. However, there is virtually no difference in returns following large downward revisions. Nevertheless, the collective results suggest a positive relation between reputation and performance, and, assuming that All-Americans are better paid, pay and performance.     

Earnings Forecasts and the Information Contained in Spinoff Announcements

This study examines spinoff announcements in conjunction with financial analysts’ forecasts of earnings. The analysis shows that spinoff announcement abnormal returns are significantly related to the firm's information environment as proxieci by financial analysts’ earnings prediction errors. The findings also indicate that analysts significantly increase their short-term earnings forecasts in response to spinoffs, but do not significantly revise their long-term earnings forecasts. However, the earnings revisions are not significantly different across prediction error groups, which confirms that spinoff-related abnormal returns cannot be attributed solely to expected performance gains.     

Analyst Forecasts and the Cross Section of European Stock Returns

We examine revisions to earnings forecasts by equity analysts and their role in predicting stock returns. We provide evidence that European stocks with net upward revised forecasts earn higher future returns than otherwise similar stocks. This effect is not concentrated in small stocks, stocks with low analyst coverage, or stocks with low book‐to‐market ratios. We find differences in the return continuation patterns of stocks with upward versus downward revisions, namely, bad news travels quickly, but good news travels slowly. This result is consistent with investors' attaching greater significance to poor earnings forecasts, but adopting a wait‐and‐see approach to good news.     

Does revenue-expense matching play a differential role in analysts’ earnings and revenue forecasts?

This paper investigates whether matching has differential implications for the accuracy of analysts' earnings and revenue forecasts. We construct a novel measure of firm-level matching and document that matching improves analysts' earnings forecasts to a greater extent than their revenue forecasts. We also document matching's differential impact on analysts' earnings and sales forecasts by proposing a new count metric capturing a wedge in the accuracy of earnings and revenue forecasts. In additional tests, we report that the differential impact of matching is less (more) pronounced in a situation where the balance sheet (income statement) orientation likely dominates. We also report that matching's differential role is weaker (stronger) when firms have high intangible intensity (analysts have appropriate resources or expertise). In short window tests, matching's role in analysts' forecast revisions is more pronounced for earnings than sales forecasts. Overall, these results show how analysts benefit from better revenue-expense matching.     

The Dynamics of Earnings Forecast Management

This paper examines whether firms manage analyst forecasts andthe associated value consequences. We find that earnings forecaststend to grow pessimistic over the forecast horizon and theseforecast changes and their timing are key determinants of whetherfirms generate positive earnings surprises: Late forecasts thatraise (lower) the consensus sharply reduce (raise) the probabilityof positive surprises. This findng is the opposite of that predictedif consensus revisions reflected new information arrival. Investorsseem to be "misled": downward consensus revisions lead to largeabnormal returns following the earnings announcement. Paradoxically,downward forecast management reduces post-announcement shareprice, as the impact of reduced forecasts dominates the gainfrom generating positive surprises.     

Financial analysts' bundling across firms: Target prices and stock recommendations

A rising trend is that analysts bundle earnings forecasts for multiple firms on the same day, and such forecast bundling is associated with low-quality forecasts. We explore target price bundling and recommendation bundling. Factors driving bundling revisions of an output for multiple firms vary across three outputs: forecasts, target prices, and recommendations. Target price (recommendation) revisions bundled for firms are less informative than stand-alone revisions. Although consistency in the direction of revisions between different outputs is typically associated with higher perceived quality, consistent revisions between outputs are not associated with higher informativeness of revisions bundled for multiple firms.