Herding and anchoring in macroeconomic forecasts: the case of the PMI

We test whether analysts display multiple biases in forecasting the Institute for Supply Management’s manufacturing purchasing manager’s index (PMI). We adopt a test that does not require knowledge of the forecaster’s prior information set and is robust to rational clustering, correlated forecast errors and outliers. We find that analysts forecast the PMI poorly and display multiple biases when forecasting. In particular, forecasters anti-herd and anti-anchor. Anti-herding supports a reputation-based notion that forecasters are rewarded not only for forecast accuracy but also for being the best forecast at a single point in time. Anti-anchoring is consistent with forecasters overreacting to private information. The two biases show a strong positive correlation suggesting that the incentives that elicit anti-herding also elicit anti-anchoring behavior. Both biases result in larger absolute errors, although the effect is stronger for anti-herding.     

Conditional Conservatism and Debt versus Equity Financing

Extant research suggests that conditional conservatism reduces information asymmetry between a firm and its shareholders as well as its debtholders. However, there is little evidence on whether conditional conservatism reduces information asymmetry differentially for shareholders and debtholders. We use the setting of a firm's choice between equity versus debt when it seeks a significant amount of external financing to examine this research question. We find that when firms raise a significant amount of external financing, the use of equity (versus debt) increases with the level of conservatism. We also find that the reduction in cost of equity associated with conservatism is greater for equity issuers than for debt issuers, but find no such difference when we examine cost of debt. In addition, we find that the positive effect of conservatism on the choice of equity issuance (versus debt issuance) is accentuated when the information asymmetry between the firm and its shareholders is more severe. Overall, our results suggest that conservatism reduces information asymmetry more between firms and shareholders than between firms and debtholders.     

Financial Analysts' Earnings Forecast Dispersion and Intraday Stock Price Variability Around Quarterly Earnings Announcements

This study investigates the relationship between the dispersion of analysts' earnings forecasts and stock price variability around quarterly earnings announcements. Consistent with theoretical predictions, the empirical analysis shows that stock price variability at the time of earnings announcements is positively related to the degree of analysts' predisclosure earnings forecast dispersion. Additionally, firms with high levels of forecast dispersion exhibit significant increases in price variability for longer periods prior to and following earnings announcements than do firms with low levels of forecast dispersion. These results suggest that there is information about the earnings announcement that becomes available to at least a subset of investors prior to the earnings release and that market participants take different amounts of time to process the information conveyed by the earnings announcement.     

Is the market valuation of banks’ loan loss provision conditional on auditor reputation?

We examine how auditor reputation conditions the market valuation of banks’ loan loss provision (LLP). The inherent uncertainty associated with and discretion permitted in estimating the LLP contributes to information asymmetry. The auditor’s certification and monitoring roles influence firm value by mitigating this information asymmetry. We examine two aspects of auditor reputation, auditor type (Big 5 vs. non-Big 5) and auditor expertise, in the banking industry. We find a significant, positive association between the discretionary component of LLP and stock return for banks audited by the Big 5 auditors. Further analysis indicates that auditor expertise within banking and not auditor type drives this significant, positive association. Overall, our results are consistent with auditor expertise in the banking industry mitigating information asymmetry between bank managers and investors and enhancing the information conveyed by discretionary loan loss provision.     

The influence of green brand innovativeness and value perception on brand loyalty: the moderating role of green knowledge

Building on arguments relating to the differences between innovation and innovativeness and their influences on brand loyalty, this study investigates how green brand innovativeness and value perception influence green brand loyalty. In addition, the influences of a mediating variable green perceived value (GPV) and a moderating variable (consumer green knowledge) on the development process of green brand loyalty are examined. Data were collected using an online survey administered to a consumer panel in China, and structural equation modelling (SEM) was used to test the conceptual model with a sample of 826 Chinese respondents. The results demonstrate that green brand innovativeness was directly associated with brand loyalty and indirectly influenced brand loyalty via GPV. Moreover, green knowledge significantly moderated the relationship between green brand innovativeness and GPV. Therefore, to promote green brand loyalty, organizations must allocate resources into enhancing consumers’ perceptions of green brand innovativeness and green value, and improving their environmental knowledge.     

Managerial discretion to delay the recognition of goodwill impairment: The role of enforcement

Under International Financial Reporting Standards, managers can use two approaches to increase the estimated fair value of goodwill in order to justify not recognizing impairment: (1) make overly optimistic valuation assumptions, and (2) increase future cash flow forecasts by inflating current cash flows. Because enforcement constrains the use of optimistic valuation assumptions, we hypothesize that enforcement influences the relative use of these two choices. We test this hypothesis by comparing a sample of 1,958 firms from 36 countries that are likely to delay recognizing goodwill impairment (suspect firms) to a sample of control firms. First, we find that firms in high‐enforcement countries use a higher discount rate to test goodwill for impairment than firms in low‐enforcement countries. We also find a more positive association between discount rate and upward cash flow management for suspect firms than for control firms. This result is consistent with suspect firms substituting optimistic valuation assumptions with inflated current cash flows. Second, we find that, relative to control firms, suspect firms exhibit higher upward cash flow management in high‐enforcement countries than in low‐enforcement countries. Third, we show that suspect firms in high‐enforcement countries are more likely to eventually impair goodwill.     

Young consumers’ green purchase behaviour in an emerging market

Young consumers represent a powerful engine in the development of environmentally conscious population as well as a promising market for green products. Marketers and organizations are therefore increasingly developing strategic marketing campaigns and environmental education programmes that target the young consumer segment. This study aims to examine a number of rational, moral, emotional and self-identity factors that may facilitate or impede green purchase behaviour among young consumers in an emerging market, Vietnam. A paper-based survey was employed to collect data from university students, which yielded an effective sample of 289 respondents. Multivariate statistics revealed that most factors (i.e. knowledge, attitudes, personal norms, self-identity and perceived barriers) significantly affected consumer purchase of energy efficient appliances, except for subjective social norms and warm glow. From these findings, implications for marketers, policy-makers and other stakeholders engaged in promoting green products are discussed.     

Does SEC FRR No. 48 disclosure communicate risk management effectiveness?

We hypothesize that the quality of market risk disclosure mandated by the U.S. Securities and Exchange Commission Financial Reporting Release No. 48 (FRR No. 48) provides useful information for assessing risk management effectiveness. Measuring risk disclosure quality as the degree of modification, we find that higher-than-expected disclosure modification is associated with lower future cash flow volatility. On average, an increase in risk disclosure modification from the lowest to the highest decile is associated with a 5.34 percent decrease in cash flow volatility. Given the significant impact of cash flow volatility on firm value and capital investment, our results highlight the importance of market risk disclosures and should be of interest to investors and analysts.     

Auditor reputation and earnings management: International evidence from the banking industry

We examine the relation between auditor reputation and earnings management in banks using a sample of banks from 29 countries. In particular, we examine the implications of two aspects of auditor reputation, auditor type and auditor industry specialization, for earnings management in banks. We find that both auditor type and auditor industry specialization moderate benchmark-beating (loss-avoidance and just-meeting-or-beating prior year’s earnings) behavior in banks. In addition, we find that once auditor type and auditor industry specialization are included in the same tests, only auditor industry specialization has a significant impact on constraining benchmark-beating behavior. In separate tests related to income-increasing abnormal loan loss provisions, we find that both auditor type and auditor expertise constrain income-increasing earnings management. Again, in joint tests, only auditor industry expertise has a significant impact on constraining income-increasing earnings management.