Management Earnings Forecasts,Earnings Announcements,and Institutional Trading in China

Abstract:

In this study, we investigate the trading behavior of institutional investors in China according to management earnings forecasts (MEFs) and earnings announcements (EAs). MEFs are mandatory under the stringent regulatory framework in China. We find evidence that both MEFs and EAs have an effect on the market. However, MEFs have a bigger effect on the market than do EAs. According to a sample of semiannual observations of firms from 2003 to 2008, we find that changes in the stock ownership of institutions are positively associated with EAs but not significantly associated with MEFs. When we further examine the relations between institutional characteristics and trading strategies, we find that growth funds exploit the arbitrage opportunity of MEFs.     

An Empirical Analysis of Qualitative Management Earnings Forecasts

Despite efforts by the Securities and Exchange Commission (SEC) to encourage corporate disclosure of quantitative management earnings projections, only a small fraction of firms voluntarily do so. Instead of quantitative estimates, a large number of firms choose to disclose qualitative (verbal) assessments of their earnings prospects. This paper is a study of the information characteristics and the usefulness of this alternative form of forecast disclosure to investors. The study examines a sample of qualitative forecast statements from the 1979–1985 period and finds associations between these forecasts and percentage changes in realized earnings per share, the direction of financial analysts' forecast revisions following the disclosure of these forecasts, and abnormal stock returns on the date of their disclosure. These associations are, however, shown to be more significant for negative (bad news) than for positive (good news) forecasts.     

业绩预告披露与盈余管理研究

盈余管理存在的根本原因在于投资者与管理层之间的信息不对称。业绩预告作为上市公司未来经营成果、财务状况与现金流量的预测,在很大程度上会影响投资者对上市公司的评估及其投资决策。从业绩预告披露的特征方面出发,研究业绩预告披露与盈余管理之间的关系,包括业绩预告的性质、预告精确度、预告误差分别与盈余管理程度的关系,结果发现：发布业绩预告的公司,盈余管理水平更高。预告精确度以及预告期间与预测当期盈余管理水平正相关,预测误差与盈余管理水平负相关。当消息类型不同的时候,预测的强制性与否以及＂变脸＂对盈余管理水平的影响不同。结论支持了上市公司财务报告迎合业绩预告披露的说法。     

On the Use of Intra-Industry Information to Improve Earnings Forecasts

We investigate whether earnings forecasts are improved by earlier earnings disclosures by firms in the same industry. We find improvements for time series forecasts, but not for analysts' forecasts. Considering prior earnings announcements reduces correlations between forecast errors and security price reactions to earnings announcements, even when incorporating these announcements improves forecast accuracy. Our explanation for this anomaly, which is supported by additional analysis, is that intra-industry information facilitates predicting transitory, rather than permanent, earnings components. The question of whether information transfers improve earnings forecasts provides the context for the analysis, but the primary contribution is the documentation of intra-industry information transfers in a setting other than capital markets.     

Tests of Market Reaction and Analysts' Forecast Revisions to the Disclosure of Improved Management Earnings Expectations: A Case of Concurrent Bad News Management Earnings Forecasts

This paper tests whether a negative stock market reaction, associated with a management forecast of near term bad earnings, is lessened by a concurrent management forecast of improved longer term earnings expectations. Stock market reactions depend on the creditability of management forecasts of improved earnings expectations. In this analysis, the authors examined market reactions around the time of management forecasts of bad earnings, with and without longer-term management forecasts of improved earnings expectations. The results show that the stock market reaction is significantly less negative when management forecasts of bad earnings are followed by management forecasts of improved long run earnings expectations than when management forecasts of bad earnings are not accompanied by management forecasts of improved earnings expectations. In addition, this paper examines financial analysts' reactions to management bad earnings forecasts and management forecasts of improved earnings expectations. The findings show that analysts react less negatively to management forecasts of improved earnings expectations than to management forecasts of bad earnings. An analysis of a sub-sample of observations shows that analysts consider management forecasts of improved earnings expectations to imply improved expected future performance, thus conveying that analysts give credence to management forecasts of improved earnings expectations. However, results show that the stock market and analysts are unable to distinguish management forecasts of improved earnings expectations that come true from management forecasts of improved earning expectations that do not come true.     

Post-Earnings Announcement Drift and Market Participants' Information Processing Biases

Prior research has been unable to explain the phenomenon known as post-earnings announcement drift, raising questions concerning the semi-strong form efficiency of the market typically assumed in capital market research. This study contributes to our understanding of this anomaly by examining drift in the context of theories that consider investors' non-Bayesian behaviors. The empirical evidence reveals that investors' overconfidence about their private information and the reliability of the earnings information are two important factors that explain drift. Finally, this study also provides insight into the puzzling relationship between dispersion and drift discussed in prior research.     

Management of Earnings and Analysts' Forecasts to Achieve Zero and Small Positive Earnings Surprises

Abstract:  This paper corroborates the finding of prior studies that managers avoid reporting earnings lower than analyst forecasts (i.e., negative earnings surprises) and provides new evidence of actions contributing to this phenomenon. Specifically, we provide empirical evidence of both (1) upward management of reported earnings and (2) downward 'management' of analysts' forecasts to achieve zero and small positive earnings surprises. Further analysis of the components of earnings management suggests that both the operating cash flow and discretionary accruals components of earnings are managed.     

Forecasts in IPO Prospectuses: The Effect of Corporate Governance on Earnings Management

Prior research suggests that managers may use earnings management to meet voluntary earnings forecasts. We document the extent of earnings management undertaken within Canadian Initial Public Offerings (IPOs) and study the extent to which companies with better corporate governance systems are less likely to use earnings management to achieve their earnings forecasts. In addition, we test other factors that differentiate forecasting from non‐forecasting firms, and assess the impact of forecasting and corporate governance on future cash flow prediction. We find that firms with better corporate governance are less likely to include a voluntary earnings forecast in their IPO prospectus. In addition, we find that while IPO firms use accruals management to meet forecasts; the informativeness of the discretionary accruals depends on whether or not the firm would have missed its forecast without the use of discretionary accruals.     

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.     

Conditional Persistence of Earnings Components and Accounting Anomalies

We suggest that the failure of investors to distinguish between an earnings component's autocorrelation coefficient (unconditional persistence) and the marginal contribution of that component's persistence to the persistence of earnings (conditional persistence) provides a partial explanation of post‐earnings‐announcement drift, post‐revenue‐announcement drift, and the accrual anomaly. When the conditional persistence of revenue surprises is high (low) relative to its unconditional persistence, both the post‐earnings‐announcement drift and the post‐revenue‐announcement drift are high (low), because investors’ under‐reaction to revenues and earnings is stronger when the persistence of revenue surprises is more strongly associated with the persistence of earnings surprises. Also, the mispricing of accruals decreases substantially when the conditional persistence of accruals is high relative to its unconditional persistence, because investors’ over‐reaction to accruals is mitigated when the persistence of accruals is indeed more strongly associated with the persistence of earnings. Our findings also suggest that financial analysts’ failure to distinguish between unconditional and conditional persistence of revenues and accruals results in more biased revenue and earnings predictions.     

Information Asymmetry and Earnings Management: Some Evidence

This paper conducts an empirical investigation of the relationship between information asymmetry and earnings management predicted by Dye (1988) and Trueman and Titman (1988). When information asymmetry is high, stakeholders do not have sufficient resources, incentives, or access to relevant information to monitor manager's actions, which gives rise to the practice of earnings management (Schipper, 1989; Warfield et al., 1995). Empirical results suggest a systematic relationship between the magnitude of information asymmetry and the level of earnings management in two different settings.     

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 Stock Prices of Property Casualty Insurers Fully Reflect Information about Earnings,Accruals, Cash Flows,and Development?

This paper examines whether the stock prices of property and casualty (P&C) insurers fully reflect information contained in earnings, cash flows and accruals, and one particular accrual—development of loss reserves. The reserve for policy losses is a major accrual for P&C firms, requires substantial judgment and is the subject of unique disclosures that reveal the ex post error in management estimates. We find that investors underestimate the persistence of cash flows and overestimate the persistence of accruals for P&C insurers, but our evidence suggests the market does not underestimate the persistence of the development accrual.     

Earnings Management in IPO Lockup and Insider Trading: Evidence from Taiwan

This paper examines the hypothesis that the timing of lockup expiration is crucial to earnings management (EM) behavior in the period after an initial public offering (IPO). Taiwan's unique two-stage lockup regulations make the Taiwanese sample an excellent candidate for examining this hypothesis. Three main results are reached. First, we find positive discretionary accruals (DAs) from the IPO quarter to the quarter after the expiration of the first-stage lockup. The DA in the quarter of the second-stage lockup expiration is significantly positive. The evidence shows that the lockup provision is key in the findings of significant EM in the IPO year and the following year. We also find a positive association between DAs in first-stage lockups and subsequent insider selling activity, indicating that insiders' selling after lockup expiration accounts for EM in the lockup period. Third, the extent of EM in first-stage lockup is negatively related to that around the IPO, consistent with the reversal nature of DAs.     

The Real and Accrual-based Earnings Management Behaviors: Evidence from the Split Share Structure Reform in China

This paper investigates the earnings management activities in Chinese listed firms and the impact of the split share structure reform (SSSREF). We demonstrate that Chinese listed firms exhibited a long-term positive relationship between real and accrual-based earnings management activities over the 2002–2011 period. This reflects the environment of weak investor protection and lack of effective corporate governance in China. Our results also indicate that the SSSREF in China has not fundamentally improved firms' quality of financial information. This may be because ownership concentration remains high. However, it is of interest that the reform has created an incentive alignment effect exogenously. We find that firms' use of discretionary accruals was constrained, and they have consequently shifted to less detectable and under-scrutinized real earnings activities after the reform. This shift is similar to that seen with the direct regulatory changes in accounting reporting rules on firms' earnings behaviors in developed countries where the investor protection environment is strong. We suggest that firms' shifting between the accrual and real-based earnings methods is an overlooked area for investors to consider in the emerging market context, and may require the attention of regulators.     

The Information Content of Corporate Pension Funding Status in Japan

This paper tests if a firm's pension funding ratio (pension assets/PBO) reveals the management's private information about the firm's operation when the firm can exercise discretion in pension funding. The lax enforcement of pension funding rules and the prevalence of management forecasts make Japanese firms an ideal testing ground. We show that, among firms with large business uncertainty, large accruals, or high effective tax rates, the pension funding ratio predicts the firm's management forecast errors significantly beyond conventional control variable and the effects of pension accounting management. However, the stock market does not appear to incorporate this information immediately.     

Earnings Management During Antidumping Investigations in Europe: Sample‐Wide and Cross‐Sectional Evidence

This paper examines earnings management by EU firms that initiate an antidumping investigation. We first document economically and statistically significant income‐decreasing earnings management around the initiation of an antidumping investigation. We show that earnings management increases when accounting data directly affect the magnitude of the tariffs imposed in the trade investigation. We also find that earnings management decreases as the number of petitioning firms increases or as the distance between petitioning firms increases, suggesting free‐rider and coordination problems. We find that earnings management increases when the petition is directed at a country that imports more goods from the petitioning firm's home country, suggesting that retaliation threats affect incentives. We document that raising equity or debt financing moderates income‐decreasing earnings management, consistent with the idea that sample firms trade off capital market and regulatory considerations. Our results indicate that contemporary research methods can detect accruals‐based earnings management in settings in which the incentives for earnings management can be clearly identified.