An Empirical Examination of the Divergence between Managers’ and Analysts’ Earnings Forecasts

We study circumstances when analysts’ forecasts diverge from managers’ forecasts after management guidance, and the consequences of this divergence for investors and analysts. Our results show that investors’ return response to earnings surprises based on analyst forecasts is significantly weaker when analyst and management forecasts diverge, and that this attenuating effect is stronger when the management forecast is more credible. When the divergent management forecast is more accurate than the analyst consensus forecast, the subsequent‐quarter analyst consensus forecast is significantly more accurate than that of the current quarter, and exhibits less serial correlation. Overall, our findings suggest that, when analyst and management forecasts diverge, investors find the two sources to contain complementary information, and analysts learn to improve their subsequent forecasts.     

Auditor Quality and the Accuracy of Management Earnings Forecasts*

In this study, we appeal to insights and results from Davidson and Neu 1993 and McConomy 1998 to motivate empirical analyses designed to gain a better understanding of the relationship between auditor quality and forecast accuracy. We extend and refine Davidson and Neu's analysis of this relationship by introducing additional controls for business risk and by considering data from two distinct time periods: one in which the audit firm's responsibility respecting the earnings forecast was to provide review‐level assurance, and one in which its responsibility was to provide audit‐level assurance. Our sample data consist of Toronto Stock Exchange (TSE) initial public offerings (IPOs). The earnings forecast we consider is the one‐year‐ahead management earnings forecast included in the IPO offering prospectus. The results suggest that after the additional controls for business risk are introduced, the relationship between forecast accuracy and auditor quality for the review‐level assurance period is no longer significant. The results also indicate that the shift in regimes alters the fundamental nature of the relationship. Using data from the audit‐level assurance regime, we find a negative and significant relationship between forecast accuracy and auditor quality (i.e., we find Big 6 auditors to be associated with smaller absolute forecast errors than non‐Big 6 auditors), and further, that the difference in the relationship between the two regimes is statistically significant.     

The Interdependent Use of Earnings and Dividends in Financial Analysts' Earnings Forecasts*

Abstract. This paper examines how analysts combine earnings and dividend information when they predict future earnings. Because both earnings and dividends are noisy indications of future earnings, we posit that analysts use the two corroboratively, to confirm the information reflected in each, and that analysts will substitute away from earnings when it is noisy and toward dividends. Using regressions of analysts' earnings forecast revisions on unexpected earnings, unexpected dividends, and five variables that reflect whether the signs of unexpected earnings and dividends confirm or contradict each other, we find evidence of both corroboration and substitution. Analysts' earnings forecast revisions are significantly related to the five corroborative variables, and this relation has statistically significant explanatory power beyond that in the magnitudes of unexpected earnings and unexpected dividends. Consistent with expectations, we find that the evidence of corroboration varies across the noisiness of earnings information; there is more evidence of corroboration when earnings are more variable. We also find evidence consistent with analysts substituting away from earnings, toward dividend information for firms with noisy earnings information (high variance). Overall, the results imply that analysts use earnings and dividend information interdependently, with some interdependency determined by the noisiness of earnings announcements. Résumé. Les auteurs examinent comment les analystes combinent l'information relative aux bénéfices et aux dividendes pour prévoir les bénéfices futurs. Les bénéfices et les dividendes étant tous deux des indicateurs imparfaits des bénéfices futurs, les auteurs posent l'hypothèse que les analystes utilisent les deux, à titre corroboratif, pour confirmer l'information que livre chacun de ces indicateurs et qu'ils préféreront les dividendes aux bénéfices, si ces derniers se révèlent un indicateur imparfait. En procédant à la régression des révisions des prévisions de bénéfices des analystes sur les bénéfices imprévus, sur les dividendes imprévus et sur cinq variables indiquant si les pronostics de bénéfices et de dividendes imprévus se confirment ou s'infirment les uns les autres, les auteurs enregistrent des données qui vont à la fois dans le sens de la corroboration et de la substitution. Les révisions des prévisions de bénéfices des analystes présentent une relation significative avec les cinq variables de corroboration, relation qui affiche un pouvoir d'explication statistiquement significatif, au-delà de celui de l'ampleur des bénéfices imprévus et des dividendes imprévus. Conformément aux prévisions, les auteurs constatent que la preuve de corroboration varie selon le degré d'imperfection de l'information relative aux bénéfices; les preuves de corroboration sont plus fortes lorsque les bénéfices varient davantage. Les auteurs font également état de constatations conformes à l'hypothèse selon laquelle les ana lystes écartent l'information relative aux bénéfices pour y substituer l'information relative aux dividendes dans le cas d'entreprises dont l'information relative aux bénéfices est imparfaite (variance élevée). Dans l'ensemble, les résultats invitent à la conclusion que les analystes utilisent l'information relative aux bénéfices et aux dividendes de manière interdépendante, une partie de cette interdépendance étant déterminée par l'imperfection de l'information communiquée en ce qui a trait aux bénéfices.     

Bias and Accuracy of Management Earnings Forecasts: An Evaluation of the Impact of Auditing*

This paper assesses how the bias and accuracy of managers' earnings forecasts in prospectuses were affected by a 1989 regulation that required the forecasts to be audited by public accountants. Theory suggests that auditors' association with the forecasts would reduce positive (optimistic) bias, by reducing moral hazard. Regulators expected that the audit requirement would also improve the accuracy of the forecasts. Both predictions were tested using management earnings forecasts disclosed in prospectuses of Canadian initial public offerings. The results show that audited forecasts contained significantly less positive bias than reviewed forecasts, but there was only a marginally significant improvement in accuracy.     

Customer Concentration and Public Disclosure: Evidence from Management Earnings and Sales Forecasts

This study examines the association between customer base concentration and corporate public disclosure policy. When the customer base is more concentrated, large customers face lower costs of accessing the supplier firm's private information, reducing customers' overall demand for the supplier's public information, suggesting a negative association between customer concentration and the amount of public disclosure. Alternatively, large customers have greater bargaining power and may demand that the supplier firm provide more public disclosures. Consistent with customer concentration facilitating private information flow from the supplier to customers, we find that the frequencies of management earnings and sales forecasts are negatively associated with customer concentration among firms with major corporate customers. These associations are stronger when the supplier and customers are engaged in more relationship-specific investments, when customers' private information acquisition costs are lower, and when it is less costly for customers to find another supplier.     

Earnings Forecasts and Price Efficiency after Earnings Realizations: Reduction in Information Asymmetry through Learning from Price*

When information asymmetry is a major market friction, earnings forecasts can lead to higher price efficiency even after the information in forecasts completely dissipates upon earnings realizations. We show this in an experimental market that features information asymmetry (i.e., some traders possess differential private information). Earnings forecasts reduce information asymmetry and lead to prices that reflect a greater amount of private information. Traders can learn more about others' information from prices. This information learned from past prices continues to reduce information asymmetry and improve price efficiency even after earnings realizations. We contribute to the disclosure literature by showing the evidence that the learning‐from‐price effect amplifies the impact of public disclosure on price efficiency.     

Analyst Coverage and the Likelihood of Meeting or Beating Analyst Earnings Forecasts

This paper examines the relation between analyst coverage and whether firms meet or beat analyst earnings forecasts. We distinguish between whether a firm's reported quarterly earnings meet (i.e., equal or exceed by one cent) or beat (i.e., exceed by more than one cent) its consensus analyst earnings forecasts. We find a positive relation between analyst coverage and whether a firm meets or beats analyst forecasts. However, the more pronounced relation is that between analyst coverage and meeting analyst forecasts. Also, when we consider exogenous shocks to analyst coverage due to brokerage mergers or closures and conglomerate spinoffs, we continue to find a robust positive relation only between analyst coverage and meeting analyst forecasts. To shed light on the causal relation involved, we examine and find that greater analyst coverage is associated with a significantly larger market reaction to negative earnings surprises. We also document that firms with greater analyst coverage are more likely to guide analyst earnings forecasts downwards. Taken together, our evidence suggests that greater analyst coverage raises the pressure on managers to meet analyst earnings forecasts.     

MD&A Quality as Measured by the SEC and Analysts' Earnings Forecasts*

This study examines the predictive value of Management Discussion and Analysis (MD&A) information. More specifically, this study tests the association between properties of analysts' earnings forecasts and MD&A quality, where MD&A quality is measured by the Securities Exchange Commission (SEC). We find that high MD&A ratings are associated with less error and less dispersion in analysts' earnings forecasts after controlling for many other expected influences on analysts' forecasts. We also find that estimated regression coefficients are consistent with MD&A information having a substantial effect on earnings forecasts. Finally, we find our results are driven by forward-looking disclosures about capital expenditures and operations, and also by historical disclosures about capital expenditures. These findings are consistent with the suggestion by many constituencies (including the SEC) that the type of information found in high quality MD&A is particularly relevant for predicting earnings.     

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.     

How Are Earnings Managed? An Examination of Specific Accruals*

There is relatively little evidence on the specific accruals used to manage earnings. This paper examines this issue by considering the use of specific accruals in three earnings‐management contexts: equity offerings, management buyouts, and firms avoiding earnings decreases. We argue that the costs of managing earnings through different income statement items vary and that the benefits of earnings management through each of these items depend on the context. We thus make differential predictions regarding which specific accrual will be used to manage earnings in each of the three contexts we consider. To measure earnings management for specific accruals, we develop performance‐matched measures to capture the unexpected component of accounts receivable, inventory, accounts payable, accrued liabilities, depreciation expense, and special items. Consistent with our predictions, we find that firms issuing equity appear to prefer managing earnings upward by accelerating revenue recognition. Specifically, we find that accounts receivable for these firms are unexpectedly high. Conversely, for the management buyout context, we predict and find unexpected accounts receivable to be negative. For firms trying to avoid reporting an earnings decrease, we expect firms to be less concerned with earnings persistence and therefore more likely to use more transitory, and less costly, items to achieve their goal. We find that special items are significantly more positive for this group. This paper provides a further step toward understanding how the incentives behind earnings management affect the method used to achieve earnings goals, and it illustrates the usefulness of examining individual accruals in specific contexts.     

Regulation and the Valuation Relevance of Book Value and Earnings: Evidence from the United States*

Electric utilities in the United States are subject to a cost-plus normal profits pricing that is designed to align the market value of equity with the balance sheet book value. Perfect alignment implies the equality of the market and book values. Extant empirical evidence suggests that, for these utilities, actual cost/profit recovery does not follow a pure cost-plus pricing, raising the prospect that income statement items contribute to the determination of market value. What is not obvious is the extent to which the noted departure from pure cost-plus pricing results in misalignment of the market and book values, or the relative contribution of income statement items to the valuation of electric utility shares. This study pursues this question, using benchmark results for a sample of manufacturing firms to highlight the degree of market-to-book alignment for regulated and competitive firms. The results show a considerable alignment of the market and book values for utilities. In examining the relevance of book value and income statement items in the determination of market value, it is found that the contribution of earnings level to explaining market value diminishes markedly in the presence of book value for electric utilities, and the contribution of earnings change to explaining returns diminishes markedly in the presence of earnings levels. Earnings level complements book value in explaining market value for manufacturing firms, while earnings change complements earnings level in explaining returns. The results further show that the market and accounting values exhibit pronounced misalignments in returns-earnings models, especially for utilities.     

The Effect of Investment Banking Relationships on Financial Analysts' Earnings Forecasts and Investment Recommendations*

Abstract. This study shows that financial analysts of brokerage firms that provide investment banking services to a company (investment banker analysts) are optimistic, relative to other (noninvestment banker) analysts, in their earnings forecasts and investment recommendations. Returns earned by following the investment recommendations of investment banker analysts, however, are not significantly different from those of non-investment banker analysts. Given that information regarding the investment banking relationships of brokerage firms is publicly available, we find evidence that capital market participants rely relatively less on the investment banker analysts in forming their earnings expectations. Although we find a significant capital market reaction around the noninvestment banker analysts' research report dates and not around the investment banker analysts' research report dates, the difference between the two market reactions is not statistically significant. Finally, we find that investment banker analysts' earnings forecasts are, on average, as accurate as those of noninvestment banker analysts. Résumé. Les auteurs mettent en évidence le fait que les analystes financiers des maisons de courtage qui offrent des services de prise ferme aux entreprises (les analystes de courtiers preneurs ferme) sont optimistes dans leurs prévisions de bénéfices et leurs recommandations de placements, par comparaison aux autres analystes (c'est-à-dire aux analystes de courtiers qui ne sont pas preneurs ferme). Les rendements obtenus par les investisseurs qui observent les recommandations de placements des analystes de courtiers preneurs ferme ne sont cependant pas sensiblement différents de ceux qu'obtiennent les investisseurs qui se fient aux analystes des courtiers qui ne sont pas preneurs ferme. Compte tenu du fait que l'information relative aux relations qu'entretiennent les maisons de courtage en matière de prise ferme est du domaine public, les constatations des auteurs confirment que les participants au marché financier s'appuient relativement moins sur le verdict des analystes des courtiers preneurs ferme dans le calcul de leur espérance de gains. Bien que les auteurs observent une réaction marquée du marché financier à proximité des dates de publication des rapports de recherche des analystes des courtiers qui ne sont pas preneurs ferme, ce qui n'est pas le cas à proximité des dates de publication des rapports de recherche des analystes des courtiers preneurs ferme, la différence entre ces deux réactions n'est pas statistiquement significative. Enfin, les auteurs constatent que les prévisions de bénéfices des analystes des courtiers preneurs ferme sont, en moyenne, aussi exactes que celles des analystes des courtiers qui ne sont pas preneurs ferme.     

The Switch-Up: An Examination of Changes in Earnings Management after Receiving SEC Comment Letters

The SEC has long asserted that earnings management practices result in adverse consequences for investors. We examine whether SEC oversight affects firms' accounting quality in terms of earnings management trade-offs. We expect that increased firm-specific regulatory scrutiny, in the form of an SEC comment letter, will induce management to switch from accrual-based earnings management (AEM), which is a main focus of the SEC, to real-activities-based earnings management (REM), which is not likely to be commented on in the SEC's review process. Consistent with our predictions, we find that AEM is lower and REM is higher following the receipt of a comment letter, relative to non-comment-letter years and a propensity-score-matched sample of non-comment-letter firms. However, we do not find a significant difference in total earnings management (i.e., the sum of AEM and REM), suggesting that the higher REM acts as a substitute for lower AEM activity. We further find that our results are driven by accounting comments relating to estimates and accruals and not by classification-only comments, which suggests that a comment letter that does not question specific issues associated with estimates and accruals is not a strong enough signal to induce the firm to change earnings management behavior. Additionally, the shift to REM is attenuated for firms with high institutional ownership. These results collectively suggest that the comment letter process effectively constrains AEM but has the unintended consequence of firms, on average, switching to REM.     

Commitment and Cost of Equity Capital: An Examination of Timely Balance Sheet Disclosure in Earnings Announcements

In this paper, I examine the relation between disclosure commitment and cost of equity capital using accelerated earnings announcement disclosures as a measure of commitment. In settings characterized by imperfect market competition, I find that firms which consistently disclose balance sheet detail in relatively timely earnings announcements have lower costs of capital compared to other firms. This result is statistically significant and economically meaningful, and is robust to various alternative measurements for cost of capital, and alternative designs addressing endogeneity and underlying information quality. Overall, this result is important because it highlights additional dimensions of disclosure commitment (consistency and timeliness), while incorporating important features from theoretical models (information quality and market competition). In particular, my results suggest that consistency and timeliness are salient features of firms' disclosure behavior that have predictable and robust relations with capital market outcomes. This result is robust to controlling for underlying information quality; however, consistent with theory, it is conditional on low levels of market competition.     

农村集体经济组织收益分配纠纷探析

随着征收农民集体土地行为的大量出现,农村集体经济组织需要对这些收益进行分配,由于相关法律法规缺失和我国农村问题所固有的复杂性,分配纠纷得不到很好地处理。在建设法治、和谐社会的背景下,解决该问题势在必行。     

21世纪初的中日经济关系审视

21世纪初的中日经济关系是在不断“磨合”、不断妥协中发展的，双方是一种互补远远大于竞争的共存与双赢的结构。中日之间应发挥相互的互补性，促进中日两国经济结构的改变，从而诞生21世纪的崭新的中日关系。这就要求对目前的中日间以“存同求异”为交涉基准的旧的模式向“存异求同”的新的模式转变，实现质的超越与突破。