Analysts’ and Investors’ Reactions to Consistent Earnings Signals

We investigate (1) whether the trajectory of the current‐quarter earnings expectation path (defined by the signs of the forecast revision and the earnings surprise) provides information about future firm performance, and (2) the extent to which analysts and investors react to that information. Our results indicate that analysts underreact more to earnings information revealed by consistent‐signal earnings expectation paths than to earnings information communicated by inconsistent‐signal expectation paths. We also find that the current earnings expectation path provides incremental explanatory power for future abnormal returns, even after controlling for the sign and magnitude of the earnings surprise. Overall, our evidence is consistent with underreaction stemming from analysts’ and investors’ bias in processing the information in consistent‐signal earnings expectation paths.     

Sticky Expectations and the Profitability Anomaly

We propose a theory of the “profitability” anomaly. In our model, investors forecast future profits using a signal and sticky belief dynamics. In this model, past profits forecast future returns (the profitability anomaly). Using analyst forecast data, we measure expectation stickiness at the firm level and find strong support for three additional model predictions: (1) analysts are on average too pessimistic regarding the future profits of high‐profit firms, (2) the profitability anomaly is stronger for stocks that are followed by stickier analysts, and (3) the profitability anomaly is stronger for stocks with more persistent profits.     

The Relevance of Analysts' Earnings Forecasts in Japan

Abstract:   This study examines the role of financial analysts in equity valuation in Japan by comparing the relevance of financial analysts' earnings forecasts, over financial statement information, to investors' decisions. We find that the value‐relevance of a set of accounting variables is very modest, but the incremental contribution of analysts' forecasts is very significant. This is in line with the expectation that the skill and expertise of analysts are more valuable in markets with poor financial disclosure, such as Japan. We also find that the importance of the financial statements increases over time while the importance of the analysts' forecasts does not change. We also provide evidence of the effect of Japanese corporate groupings, keiretsu, on the informativeness of accounting signals and earnings forecasts. The results show that the contribution of accounting variables to valuation is lower for keiretsu firms, which supports the exclusionary hypothesis that companies which are a part of keiretsu, disclose less information than do non‐keiretsu companies. The analysts' forecasts are equally important for investors in both types of firms.     

Analysts' Selective Coverage and Subsequent Performance of Newly Public Firms

This study examines the ability of analysts to forecast future firm performance, based on the selective coverage of newly public firms. We hypothesize that the decision to provide coverage contains information about an analyst's underlying expectation of a firm's future prospects. We extract this expectation by obtaining residual analyst coverage from a model of initial analyst following. We document that in the three subsequent years, initial public offerings with high residual coverage have significantly better returns and operating performance than those with low residual coverage. This evidence indicates analysts have superior predictive abilities and selectively provide coverage for firms about which their true expectations are favorable.     

Overseas equity analysis by UK analysts and fund managers

This paper examines how UK-based analysts and fund managers cope with international differences in financial reporting systems when analysing overseas equities. This subject has become increasingly important given the internationalisation and institutionalisation of equity markets. Our results indicate that there is a substantial reliance on sources other than the annual report by both groups when analysing overseas companies. We also find considerable variation in the approach to analysing equities internationally. In particular, we find evidence that there is greater reliance on alternative sources to accounting information (such as other foreign analysts) in countries characterised as having weak equity markets. Finally, we examine the coping mechanisms that analysts and fund managers employ when analysing overseas securities, including reliance on locally based analysts, use of non-accounting information, use of more familiar accounting standards and re-stating accounts to a more familiar basis.     

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.     

Value relevance of analyst earnings forecasts in emerging markets

Even though research in accounting and finance has extensively examined the role of financial analysts in developed economies, this issue has not been thoroughly examined in an emerging market setting. In this paper, I examine whether, following a market opening, analyst forecast accuracy and the market's reliance on analyst forecasts increase with time. Accuracy is expected to increase over time as analysts exert more effort and gain valuable forecasting experience. Results indicate that time is positively related to analyst forecast accuracy after controlling for a number of other firm and country characteristics. Second, I posit that time should also be related to the market's propensity to use analyst forecasts to form earnings expectations. As markets open and investors become more sophisticated, the reliance on analyst forecasts should also increase. Results are consistent with this expectation. In particular, I find that in the first sub-period earnings expectations based on random walk exhibit greater relative information content than earnings expectations based on analyst forecasts. This pattern is reversed in the third sub-period where analyst forecast errors better explain returns. Incremental information content tests produce similar results. Future research should further investigate the relation between financial analysts and other important market characteristics in emerging economies.     

Does trading volume detect information content in earnings reconciliations of foreign firms?

Currently, foreign firms trading securities on U.S. markets provide periodically a quantitative reconciliation of selected financial data consistent with U.S. GAAP (hereafter referred to as reconciled information) in Form 20-F. The SEC is examining whether users believe that this reconciliation process provides additional information above that provided by the foreign GAAP earning announcement and whether this incremental information enhances usefulness for market participants. We examine whether the reconciliation affects a primary indicator of information usefulness: the trading volume of capital markets participants.We use a regression model to examine the relation between a measure of abnormal trading volume and four firm-specific variables in the firm's information environment: similarities of accounting systems, analyst following, difference between reconciled earnings and foreign GAAP earnings, and dispersion of analysts’ expectations. We find a significant relation between abnormal volume and the reconciled earnings number and between abnormal volume and the dispersion of analysts forecasts. Our findings suggest that market participants may use the 20-F reconciliation in trading decisions.     

The effects of firms’ information environment on analysts’ herding behavior

We find financial analysts herd to a greater degree in firms with more opaque information environments as measured by the incidence of short-term institutional investors present. The S-statistic, a measure of forecast bias, and forecast timing and quality metrics are used to measure analyst herding behavior. The results are consistent with the notion that opaque information environments are more conducive to analysts engaging in reputational herding behavior where more capable analysts act first and less capable analysts follow. Additionally, analysts are more likely to issue forecast revisions subsequent to management earnings guidance in less opaque environments. Robustness tests indicate our operational measure of opacity is not subsumed by other measures of the information environment, namely information asymmetry.     

Does the Scope of the Sell‐Side Analyst Industry Matter? An Examination of Bias,Accuracy, and Information Content of Analyst Reports

We examine changes in the scope of the sell‐side analyst industry and whether these changes impact information dissemination and the quality of analysts’ reports. Our findings suggest that changes in the number of analysts covering an industry impact analyst competition and have significant spillover effects on other analysts’ forecast accuracy, bias, report informativeness, and effort. These spillover industry effects are incremental to the effects of firm level changes in analyst coverage. Overall, a more significant sell‐side analyst industry presence has positive externalities that can result in better functioning capital markets.     

Beyond cheap talk: management's informative tone in corporate disclosures

This study investigates the information content of Management Discussion and Analysis (MD&A) reports of listed Chinese companies. We develop a Chinese word dictionary and measure the tones of MD&As. Our results indicate that tone is positively associated with future earnings and is particularly useful when a firm's future prospect is uncertain, accounting information is difficult to understand, or board monitoring is strong. Further analyses show that tone also predicts future cash flow, future sales growth, market reactions, analysts’ revisions, and institutional investors’ shareholdings. Together, we provide robust evidence that in emerging markets such as China, management tone conveys valuable information beyond cheap talk.     

Do accurate earnings forecasts facilitate superior investment recommendations?

We find that analysts who issue more accurate earnings forecasts also issue more profitable stock recommendations. The average factor-adjusted return associated with the recommendations of analysts in the highest accuracy quintile exceeds the corresponding return for analysts in the lowest accuracy quintile by 1.27% per month. Our findings provide indirect empirical support for valuation models in the accounting and finance literatures (e.g., Ohlson, 1995) that emphasize the role of future earnings in predicting stock price movements. Our results also suggest that imperfectly efficient markets reward information gatherers, such as security analysts, for their costly activities in generating superior earnings forecasts.     

New evidence on price impact of analyst forecast revisions

Previous research shows a positive relationship between consensus forecast revisions and stock returns in developed markets. We obtain new evidence from four major Asia-Pacific markets that suggest that abnormal returns are related to latest forecast revisions. The price impact of negative revisions is consistently stronger than that of the positive revisions. We also found considerable differences in price impact between developed and emerging markets for positive revisions, while no such difference is detected for negative revisions. The latest forecast revisions and category of analysts (those working in international broking firms) appear to be two key determinants of abnormal stock returns.     

Predictive gains to segmental disclosure matrices,geographic information and industry sector comparability

The aim of this study is to provide a detailed analysis of the multi-dimensional characteristics of segmental reporting, and their impact on improving investor-insight. We do this by examining the ability of segmental reporting characteristics among FTSE-100 firms to explain variation in the accuracy of analysts’ forecasts of earnings per share. We find that analyst-insight is significantly improved by the provision of data within a business-geographical matrix format, consistent with prior ‘laboratory’ evidence and UK analysts’ stated opinions in surveys. We also find that analyst-insight is improved where firms provide information regarding differences between their geographic markets and origins. In addition, analysts obtain improved insight from business segments that have a high degree of comparability to their respective industry sectors and where geographic segments are reported in a detailed manner.     

The value of stock analysts' recommendations: Evidence from emerging markets

This is the first study to empirically examine post-recommendation buy and hold abnormal returns in emerging markets. By analyzing a sample of 13 emerging countries over the decade from 1996 to 2005, we find that stock prices react strongly to stock analyst recommendations and revisions. We also find that there is a stronger positive bias in analyst recommendations and revisions in emerging markets compared with that in developed markets. In our cross-sectional analysis, we find that the Market-to-Book ratio is the primary indicator for Buy and Strong Buy recommendation regressions. This indicates that stock analysts in emerging markets prefer high growth stocks with attractive characteristics.     

Stock price synchronicity and analyst coverage in emerging markets

This paper examines the relation between the stock price synchronicity and analyst activity in emerging markets. Contrary to the conventional wisdom that security analysts specialize in the production of firm-specific information, we find that securities which are covered by more analysts incorporate greater (lesser) market-wide (firm-specific) information. Using the R² statistics of the market model as a measure of synchronicity of stock price movement, we find that greater analyst coverage increases stock price synchronicity. Furthermore, after controlling for the influence of firm size on the lead–lag relation, we find that the returns of high analyst-following portfolio lead returns of low analyst-following portfolio more than vice versa. We also find that the aggregate change in the earnings forecasts in a high analyst-following portfolio affects the aggregate returns of the portfolio itself as well as those of the low analyst-following portfolio, whereas the aggregate change in the earnings forecasts of the low analyst-following portfolio have no predictive ability. Finally, when the forecast dispersion is high, the effect of analyst coverage on stock price synchronicity is reduced.     

The behavior of financial analysts during the Asian financial crisis in Indonesia,Korea, Malaysia,and Thailand

This study investigates the behavior of a potentially influential class of market participants, the stock analysts, around the period of market crashes in four Asian countries. We find that analysts not only failed to anticipate the weaknesses in the firms they covered before the crash, they also failed to sufficiently adjust their forecasts after these markets crashed. Throughout the entire period of the study, the magnitudes of forecast errors were several times to that observed in the pre-crash period. However, we also do not find evidence of panic or herding on a large scale. Other issues investigated in this paper include the changes in coverage, changes in forecasts accuracy, the extent analysts agree and the patterns of their convergence for the sample. We also compare analyst forecasts for large versus small firms, and for high- versus low-growth/quality firms. A contribution to the literature is the cataloguing of models that may provide explanations for investors' expectations during a market crash.     

美国特许金融分析师认证体系分析

美国“特许金融分析师”(Chartered Financial Analyst，简称CFA)是一种金融投资从业专业资格认证。自从1962年1月，美国“投资管理与研究协会”(AIMR)，通过授予CFA称号来确认从业人员具有高级专业资格。美国投资管理研究协会(AIMR)的“特许金融分析师”认证体系值得我们借鉴。培养和认证中国高级金融分析师，将提高我国金融从业人员的整体素质，增强我国金融业在国际金融市场的竞争力。     

How efficient is the market for Australian firms’ earnings information?

We construct a measure of the speed with which forecasts issued by sell-side analysts accurately forecast future annual earnings. Following Marshall, we label this measure earnings information flow timeliness (EIFT). This measure avoids the aggregation problem inherent in price-based measures of information efficiency. We document large variation in EIFT across firm-years, and show that EIFT is positively associated with the extent of analyst following, consistent with increased analyst coverage improving the speed with which earnings-related information is recognised. We also find that EIFT is higher for firm-years classified as ‘bad news’ (i.e., where analysts’ forecasts at the start of the financial period exceed the reported outcome). However, when we separately consider instances where analysts appear to forecast non-GAAP (or ‘street’) earnings rather than GAAP earnings, we find that the greater timeliness of bad news is concentrated among observations where analysts forecast non-GAAP earnings, where unusual items are typically excluded. We conclude that the market for accounting information is more efficient for negative operating outcomes than for negative outcomes reflecting unusual items.     

Changes in analysts’ stock recommendations following regulatory action against their brokerage

Review of Accounting Studies - Despite the importance of sell-side analysts in the capital markets, we know little about the effectiveness of routine monitoring of the sell-side industry. We...