Do product market threats affect analyst forecast precision?

We examine how product market threats influence the precision of analyst forecasts. Greater competitive threats may make forecasting more difficult by increasing the uncertainty regarding future cash flows and by influencing the quality of financial disclosure. Using a firm-specific measure of product market threats (i.e., fluidity), we find that analysts are more likely to be less precise forecasting earnings for highly fluid firms and that the lack of precision is not fully explained by performance volatility. Our findings further suggest that firms with fluid products have lower accruals quality and that they are more likely to withheld information regarding contract terms and sales from major customers. Cross-sectional analysis further suggests that the effect of fluidity on analyst forecasts is more pronounced when firms have flexibility in disclosure choices. Using significant changes in tariff rates as a quasi-natural experiment, we find that analyst forecast precision is significantly lower following tariff reductions.     

Do corporations manage earnings to meet/exceed analyst forecasts? Evidence from pension plan assumption changes

A significantly larger number of firms increase the expected rate of return on pension plan assets (ERR) to make their reported earnings meet/exceed analyst forecasts than would be expected by chance. In the short run, the stock market reacts positively to these firms’ earnings announcements, suggesting that investors fail to recognize that earnings benchmarks are achieved through ERR manipulation. In the long run, however, firms that employ this earnings management strategy significantly underperform control firms in both stock returns and operating performance.     

Do voluntary disclosures of product and business expansion plans impact analyst coverage and forecasts?

We investigate whether voluntary disclosures of product and business expansion plans affect analyst coverage and forecasts. We find that the level of analyst coverage is positively associated with the incidence of disclosures of product and business expansion plans. We also find that product and business expansion disclosures increase the informativeness of analyst earnings forecasts. We find no evidence that product and business expansion disclosures increase analyst forecast errors. Overall, our study contributes to understanding the role of product and business expansion disclosures in analyst forecast behaviour.     

Why are some mutual funds closed to new investors?

Fund families typically claim that closing a fund protects the fund's superior performance by preventing it from growing too large to be managed efficiently. Even though funds with better performance and larger size are more likely to be closed, there is no evidence that closing a fund can indeed protect its performance. Instead, fund closing decisions are more likely to be motivated by spillover effects – by closing a star fund, the fund family signals its superior performance and also brings investors' attention and investments to other funds in the family. Some evidence exists to suggest that the closing strategy is effective in generating higher inflows into the rest of the family, at least in the short run.     

Do managers manage earnings to ‘just meet or beat’ analyst forecasts?: Evidence from Australia

This paper examines whether managers manage earnings to ‘just meet or beat’ analyst forecasts in Australia. Previous Australian studies on benchmark-beating have focused on loss avoidance and small earnings increases as benchmarks [Coulton, J., Taylor, S., & Taylor, S. (2005). Is ‘benchmark beating’ by Australian firms evidence of earnings management? Accounting and Finance, 45, 553-576; Holland, D., & Ramsay, A. (2003). Do Australian companies manage earnings to meet simple earnings benchmarks? Accounting and Finance, 43, 41-62]. This paper extends this earlier research on benchmark-beating in Australia by incorporating analyst forecast as an important benchmark. Using three different models of unexpected accruals as proxies for earnings management, this study did not find any significant difference between the mean and median unexpected accruals of the “‘just meet or beat” group as against the “just miss” group. Furthermore, for a long period of time (1997-2002), the proportion of Australian firms ‘just meeting or beating’ analyst forecasts benchmark increased, although such increase was not statistically significant.     

How quickly do investors react to analyst reports? Evidence from reports released outside trading hours

This study analyzes whether the publication timing of reports released outside trading hours affects subsequent price drift to determine if investors respond immediately to analyst reports. Significant price drifts are observed for revisions in target prices, especially when a report is released within two hours before the market opens. Furthermore, the influence of publication timing is crucial when investors must process information about earnings announcements and multiple reports. Conversely, the influence is irrelevant to the visibility of reports (e.g., broker size and star analyst status). The identified limitation of investors' response is attributable to their limited information-processing capacity.     

Do investors hold that they know? Impact of familiarity bias on investor’s reluctance to realize losses: Experimental approach

In this article we investigate the impact of familiarity bias on the individual investor’s reluctance to realize losses. Our experimental approach reveals a strong correlation between familiarity and disposition effect. We conducted 714 tests in which different respondents could sell stocks of two types – winners and losers. One group of respondents “owned” familiar assets and another group operated anonymous portfolios. The results of the experiment show that an individual investor’s tendency to ride losers too long is more than twice as high in the case of unfamiliar stocks as it is when assets are familiar to the holder.     

Are US-Dollar-Hedged-ETF investors aggressive on exchange rates? A panel VAR approach

Exchange traded funds (ETFs) are a multi-trillion dollar market that epitomizes financialization due to its recent growth. This study examines the behavior of U.S. listed currency hedged ETF investors towards changes in the underlying benchmark and foreign exchange rate from July 2011 to November 2015 using a panel VAR approach. We find that investors are able to anticipate changes in future exchange rates and invest in currency hedged ETFs prior to changes. Granger-causality tests confirm that these investors proactively trade before large real exchange rate movements. These results suggest that the use of financial instruments such as ETFs to hedge against exchange rate volatility may have itself become a source of volatility, which have implications for the further financialization of the ETF industry.     

The performance of venture capital investments: Do investors overreact?

Using a unique proprietary data set of over 5400 realized and unrealized venture capital investments between 1980 and 2005, we examine the impact of demand-related factors, e.g. entrepreneurial activity, as well as supply-related factors, i.e. money provided by VC investors, on the return of individual VC investments. This way, we are able to shed more light on the question whether volatile VC investment returns are rather driven by fundamental changes with regard to the number of attractive investment opportunities or by the overreaction by investors. We find that rising demand for VC, i.e. an increase in entrepreneurial activity, results initially in higher returns. However, our results also indicate that overreaction on the supply side can be observed, destroying deal-level results. Overfunding, specifically overinvesting seems to be a recurring characteristic of the VC industry. In fact, contra-cyclical investment strategies yield highest deal-level returns.     

Do investors turn a blind eye to risk-factor disclosures by state-supported firms?

There is scant empirical evidence on how government involvement affects investor reactions toward firm-specific information. Our study provides new evidence on how investors respond to risk-factor disclosures in IPO prospectuses in China, where state-supported firms presumably receive government-offered implicit insurance against bankruptcy risk while bearing significant agency risks. We find an insignificant association between risk-factor disclosure quality and IPO underpricing (or post-IPO stock return volatility) among state-supported firms. The finding suggests that state-offered implicit insurance becomes the predominant consideration when investors value IPO shares of state-supported firms, thereby weakening investor reactions to high-quality risk-factor disclosures. Our study expands the scope of IPO underpricing literature by implying that simply increasing disclosure transparency in the IPO prospectus may not resolve the IPO underpricing issue in a government-dominated economy such as China.     

Do Sukuk provide diversification benefits to conventional bond investors? Evidence from Turkey

We investigate the contribution of Sukuk in diversification of bond portfolios. We do so by comparing Turkish bond funds that invest exclusively in conventional bonds (pure conventional bond funds), in Sukuk (pure Islamic bond funds), and in both (mixed bond funds) among each other for the period of 2014–2019. We employ tests of differences in means and variances of various risk-return measures as well as mean-variance spanning and intersection tests in order to uncover the diversification potentials of Sukuk in the portfolio management industry. Our results suggest that bond funds, of which the portfolios are composed of a combination of Sukuk and conventional bonds (i.e. mixed bond funds), have a relatively “lower risk-higher return” profile. Moreover, including Sukuk to conventional bond portfolios theoretically offers significant diversification opportunities for investors, particularly when the economy worsens.     

Does ESG matter to investors? ESG scores and the stock price response to new information

We examine how a third-party assessment of a firm's relative ESG attractiveness affects investor demand for the firm's equity in the presence of new information. Utilizing an event-study methodology, with credit-rating change events as proxies for new positive and negative information, we find evidence supporting a high ESG score as a significant factor in determining how investors respond to new positive information. Specifically, after controlling for relevant fixed effects, we find that the highest quartile of ESG scores amplifies the positive stock-price reaction to credit-rating upgrades by 130 basis points, providing evidence of confirmation bias.     

Wage gap and stock returns: Do investors dislike pay inequality?

Recent research shows that a high wage-gap between managers and workers identifies better-performing firms, but the stock market does not seem to price this information. In this paper, we show that not all investors neglect pay inequality. Using a unique data set on German firms’ employee compensation, we find that the mispricing of the wage gap is driven by limits to arbitrage. Specifically, some investors seem to bid up low-wage-gap stocks for non-monetary reasons, thus exhibiting a preference for low pay-inequality. The results suggest that firms with equitable pay schemes are rewarded with a lower cost of capital.     

Public management: A third approach?

The idea that management in the public sector has everything to learn from the private sector has been dominant in the 1980s. There is, however, scope for mutual learning across the sectoral divide if the primary concern of managers ‐whether in business or government — is to be effectiveness.     

Do accounting standards matter to financial analysts? An empirical analysis of the effect of cross-listing from different accounting standards regimes on analyst following and forecast error

This paper explores whether the effects of cross-listing on analyst following and forecast error differ among firms with different accounting standards. The results reveal a higher increase in the number of analysts for cross-listed firms that follow their home country's GAAP prior to cross-listing and reconcile or switch to IAS/US GAAP or UK GAAP after cross-listing, compared to those that adopt IAS or US GAAP prior to cross-listing. We find that firms that switch to IAS/US GAAP have a higher increase in analyst following after cross-listing compared to firms that reconcile to IAS/US GAAP. In addition, we find a higher increase in analyst following after cross-listing for firms from low-level accounting standards environments compared to firms from high-level accounting standards environments. Our results show evidence of an increase in the magnitude of analysts’ forecast error after cross-listing for firms that follow their home country's GAAP pre-cross-listing but reconcile post-cross-listing to IAS/US GAAP or UK GAAP. On the other hand, we report a decrease in forecast error for firms that switch to IAS/US GAAP.     

Capital flows to emerging market economies: A brave new world?

We examine the determinants of net private capital inflows to emerging market economies (EMEs) since 2002. Our main findings are: First, growth and interest rate differentials between EMEs and advanced economies and global risk appetite are statistically and economically important determinants of net private capital inflows. Second, there have been significant changes in the behavior of net inflows from the period before the recent global financial crisis to the post-crisis period, especially for portfolio inflows, partly explained by the greater sensitivity of such flows to interest rate differentials since the crisis. Third, capital controls introduced in recent years do appear to have discouraged both total and portfolio net inflows. Finally, we find positive effects of unconventional U.S. monetary policy on EME inflows, especially portfolio inflows. Even so, U.S. unconventional policy is one among several important factors influencing flows.     

McGrath v Riddell: A flexible approach to the insolvency distribution rules?

The rules relating to the division of the insolvent estate assume considerable importance in the field of international insolvencies, where different legal systems interact. International instruments including the European insolvency regulation and the UNCITRAL Model Law on Cross‐Border Insolvency have provided a framework which governs the relationship between local and foreign distribution schemes. For English lawyers, questions remain however regarding the future role of the courts' statutory power to cooperate with the courts of ‘relevant’ countries or territories, and of the common law principle of universalism. An important issue connected to the determination of such questions is the established judicial approach to the pari passu rule, in the application of domestic law. This paper examines the manifestation of this tension in the litigation arising from the collapse of the HIH Casualty & General Insurance group of companies. It notes the scope which remains for continued resort to the statutory power of cooperation, and the potential for the Cross‐Border Insolvency Regulations 2006 to encourage a more flexible approach to resolving differences between distribution schemes. Copyright © 2010 John Wiley & Sons, Ltd.     

Do changes in the SG&A ratio provide different information about changes in future earnings,analyst forecast revisions,and stock returns under different circumstances?

In fundamental analysis, increases (decreases) in the ratio of selling, general and administrative (SG&A) costs to sales (SG&A ratio) are perceived as negative (positive) signals regarding future firm performance. However, this interpretation focuses on the overall change in the SG&A ratio and ignores the underlying changes in the components of the ratio (sales and SG&A costs). Although prior research examines the changes in the SG&A ratio under some different circumstances, there is no study that examines all the ways that managers adjust costs in reaction to changes in sales. Therefore, I create six subsamples representing all possible combinations of changes in sales, SG&A costs, and the SG&A ratio and test whether changes in the SG&A ratio are informative about future earnings, analyst forecast revisions, and stock returns under these different circumstances. I find that changes in the SG&A ratio in four of my six subsamples provide information about changes in future earnings. I also find that analysts do not impound all of the information contained in the signals into their forecast revisions and in some cases investors appear to understand this fact.     

Investment and access to external finance in Europe: Does analyst coverage matter?

We aim to determine whether analyst coverage improves European firms’ access to capital markets and investment. Based on a data set that includes firms from several European countries between 2000 and 2015, we implement a treatment effect framework and an instrumental variables (IV) approach, in which the intensity of industry-level waves in coverage is used as an instrument for firm-level coverage. We show that analyst coverage is favorable to firms’ debt and share issuance and their investment expenses. Our paper emphasizes the key role of financial analysts in improving European firms’ financial conditions.     

Do locals know better? A comparison of the performance of local and foreign institutional investors

We compare the performance of local versus foreign institutional investors using a comprehensive data set of equity holdings in 32 countries during the 2000–2010 period. We find that foreign institutions perform as well as local institutions on average, but only domestic institutions show a trading pattern consistent with an information advantage. Our results suggest a smart-money effect of local institutions in countries subject to higher information asymmetry, non-English speaking countries, countries with less efficient stock markets, with poor investor protection, or high levels of corruption. The local advantage is more pronounced in periods of market turmoil and in illiquid stocks.