Rational Expectations and Security Analysts' Earnings Forecasts

This paper investigates the rationality of security analysts' forecasts. The forecasts of analysts participating in Lynch, Jones, and Ryan's Institutional Brokers Estimate System (I/BE/S) data base are evaluated relative to past values of their own forecast errors, past values of forecasted earnings per share, and quarterly percentage changes in publicly available macroeconomic and financial time series. The publicly available series include the consumer price index, unemployment rate, oil prices, stock prices, gross national product, and corporate profits. The authors conduct a generalized orthogonality test and include only information available to analysts at the time the forecasts are made. The empirical results reject analyst forecast rationality, but not without exception.     

FURTHER EVIDENCE ON EMPIRICAL RELATIONSHIPS BETWEEN EARNINGS AND CASH FLOWS

Recently in Australia, regulations have been proclaimed requiring companies to make cashflow disclosures in addition to earnings disclosures from 30 June 1992. This paper provides evidence on relationships between earnings and cash flow measures and in so doing examines the external validity of a U.S.A. study of these relationships by Bowen, Burgstahler and Daley [1986]. We also extend their study through an industry analysis of the relationships. Evidence is presented first that shows low correlations between traditional cash flow measures (i.e., net income plus depreciation and amortisation; and working capital from operations) and a more refined cash flow measure (with additional adjustments for changes in non-cash current assets and current liabilities). Second, traditional cash flow measures exhibit high correlations with earnings, while the more refined cash flow measure has a lower correlation with earnings. Finally, traditional cash flow measures better predict future cash flows than models based on earnings or a more refined cash flow measure. The industry evidence, albeit on small sample sizes, shows that the results on the first two issues, but not the latter issue, are generalisable across industry categories.     

Equity Accounting: Empirical Evidence and Lessons from the Past

This paper analyses the recently issued accounting standard prAASB 1016 and its predecessor ED 71 in the light of the historical development of equity accounting in Australia and overseas. Empirical research shows that equity accounting was not universally adopted before being banned and that, given a voluntary choice of accounting method, firms are more likely to adopt equity accounting when they hold material investments in associated companies, when the investments in associates are unlisted and when there is a greater level of interdependency between the investor and investee, as evidenced by the existence of cross-guarantees or the level of non-capital transactions which take place. There is no empirical evidence supporting the degree of influence as an important consideration in the adoption decision.     

The use of injury surveillance databases to identify emerging injury hazards

Among the many valuable uses of injury surveillance is the potential to alert health authorities and societies in general to emerging injury trends, facilitating earlier development of prevention measures. Other than road safety, to date, few attempts to forecast injury data have been made, although forecasts have been made of other public health issues. This may in part be due to the complex pattern of variance displayed by injury data. The profile of many injury types displays seasonality and diurnal variance, as well as stochastic variance. The authors undertook development of a simple model to forecast injury into the near term. In recognition of the large numbers of possible predictions, the variable nature of injury profiles and the diversity of dependent variables, it became apparent that manual forecasting was impractical. Therefore, it was decided to evaluate a commercially available forecasting software package for prediction accuracy against actual data for a set of predictions. Injury data for a 4-year period (1996 to 1999) were extracted from the Victorian Emergency Minimum Dataset and were used to develop forecasts for the year 2000, for which data was also held. The forecasts for 2000 were compared to the actual data for 2000 by independent t-tests, and the standard errors of the predictions were modelled by stepwise hierarchical multiple regression using the independent variables of the standard deviation, seasonality, mean monthly frequency and slope of the base data (R = 0.93, R(2) = 0.86, F(3, 27) = 55.2, p < 0.0001). Significant contributions to the model included the SD (beta = 1.60, p < 0.001), mean monthly frequency (beta = -0.72, p < 0.002), and the seasonality of the data (beta = 0.16, p < 0.02). It was concluded that injury data could be reliably forecast and that commercial software was adequate for the task. Variance in the data was found to be the most important determinant of prediction accuracy. Importantly, automated forecasting may provide a vehicle for identifying emerging trends.     

Organizational ambidexterity and financial performance in the banking industry: evidence from a developing economy

Journal of Financial Services Marketing - The paper examined the relationship between organizational ambidexterity on the attitude of employees and the financial performance of the banking sector...     

Targets' Accounting Conservatism and the Gains from Acquisition*

We present evidence on the effects of target firms' accounting conservatism in a merger and acquisition transaction. Conservatism is distinct from other accounting or accrual quality constructs examined in prior work. Its unique features can lead to potential benefits for both the targets and the acquirers. The use of conservatism by targets reduces acquirers' risks of acquiring underperforming assets or overpaying for well-performing assets. In addition, targets' conservatism results in greater production of verifiable information that can help the acquirers better estimate and realize synergies of the combined firm. Consistent with these arguments, we find that firms with greater accounting conservatism are more likely to receive a bid. We also find that targets' conservatism increases the deal premium and the announcement returns of both the targets and the acquirers, respectively. Overall, these results indicate that conservatism provides benefits to both sellers and buyers of equity in an acquisition transaction.