How efficient is the market for Australian firms’ earnings information?

We construct a measure of the speed with which forecasts issued by sell-side analysts accurately forecast future annual earnings. Following Marshall, we label this measure earnings information flow timeliness (EIFT). This measure avoids the aggregation problem inherent in price-based measures of information efficiency. We document large variation in EIFT across firm-years, and show that EIFT is positively associated with the extent of analyst following, consistent with increased analyst coverage improving the speed with which earnings-related information is recognised. We also find that EIFT is higher for firm-years classified as ‘bad news’ (i.e., where analysts’ forecasts at the start of the financial period exceed the reported outcome). However, when we separately consider instances where analysts appear to forecast non-GAAP (or ‘street’) earnings rather than GAAP earnings, we find that the greater timeliness of bad news is concentrated among observations where analysts forecast non-GAAP earnings, where unusual items are typically excluded. We conclude that the market for accounting information is more efficient for negative operating outcomes than for negative outcomes reflecting unusual items.     

Asymmetry,Complementarities, and State Dependence in Federal Reserve Forecasts

Forecasts are a central component of policymaking; the Federal Reserve's forecasts are published in a document called the Greenbook. Previous studies of the Greenbook's inflation forecasts have found them to be rationalizable but asymmetric if considering particular subperiods, for example, before and after the Volcker appointment. In these papers, forecasts are analyzed in isolation, assuming policymakers value them independently. We analyze the Greenbook forecasts in a framework in which the forecast errors for different variables are allowed to interact. We find that allowing the losses to interact makes the unemployment forecasts virtually symmetric, the output forecasts symmetric prior to the Volcker appointment, and the inflation forecasts symmetric after the onset of the Great Moderation.     

Forecasting the past: the case of US interest rate forecasts

This study evaluates 10-year US government bond yield forecasts and three-month US Treasury bill rate forecasts for the period between October 1989 and December 2004. In total, 136 forecast time series with approximately 13,800 forecast data were scrutinized, making this the most extensive analysis of interest rate forecasts to date. Not one of the forecast time series proved to be unbiased. In the majority of cases, information from the past was not efficiently integrated into the forecasts. The sign accuracy is significantly better than random walk forecasts in only a very few of the forecast time series. The modified Diebold–Mariano test for forecast encompassing reveals that the information content of most of the forecast time series is lower than that of the naïve forecasts, the simple ARIMA models, the implicit forward rates, or average interest rate expectations. The forecasting process is dominated by the present and past market situation.     

An empirical assessment of the premium associated with meeting or beating both time-series earnings expectations and analysts’ forecasts

Recent research provides evidence of a market premium accruing to firms that meet or beat analysts’ forecasts. We find similar results for our sample of firms. However, we also find a market premium for firms that meet or beat time-series forecasts, and that the highest market premium accrued to firms that meet or beat both analysts’ and time-series forecasts. These findings are supported by assessments of future financial performance over the next two subsequent years. Our findings are consistent with the notion that when time-series benchmark is used in conjunction with analysts’ forecasts, investors obtain a more reliable (i.e., less noisy) signal regarding whether firms have actually met or beaten market expectations.

Australian evidence on analysts' cash flow forecasts: issuance,accuracy and usefulness

This study examines the factors affecting the issuance, accuracy and usefulness of analysts' cash flow forecasts (CFFs) in Australia. Given the economic importance of the mining industry in Australia, we find that analysts are likely to provide CFFs for mining firms with poor financial health and high default risk. In contrast, analysts' provision of CFFs increases with the degree of financial health for non‐mining firms. The determinants of the issuance and accuracy of analysts' CFFs also differ in pre‐ and post‐IFRS adoption periods. Our results add new evidence on the effect of IFRS adoption on analysts' cash flow forecasting behaviours.     

Corporate risk-taking,firm value and high levels of managerial earnings forecasts

We examine the impact of high levels of managerial earnings forecasts, an important form of voluntary disclosure, on corporate risk-taking and firm value. Theory and anecdotal evidence suggest that a policy of high disclosure may reduce managers' willingness to invest in higher-risk, higher-return projects. We first verify, as in prior research, that corporate risk-taking is associated with higher future firm value. We then document a negative relation between firms with high levels of forecasting and corporate risk-taking. Finally, we provide evidence suggesting that high levels of managerial earnings forecasts reduce the positive association between corporate risk-taking and future firm value. Our results are robust to alternative measures of corporate risk-taking and future firm value, and alternative definitions of high levels of managerial earnings forecasts. Our results may be of importance to varying interests as they highlight the potential for high levels of earnings forecasts to inhibit corporate risk-taking and lower firm value.     

Out-of-sample density forecasts with affine jump diffusion models

We conduct out-of-sample density forecast evaluations of the affine jump diffusion models for the S&P 500 stock index and its options’ contracts. We also examine the time-series consistency between the model-implied spot volatilities using options & returns and only returns. In particular, we focus on the role of the time-varying jump risk premia. Particle filters are used to estimate the model-implied spot volatilities. We also propose the beta transformation approach for recursive parameter updating. Our empirical analysis shows that the inconsistencies between options & returns and only returns are resolved by the introduction of the time-varying jump risk premia. For density forecasts, the time-varying jump risk premia models dominate the other models in terms of likelihood criteria. We also find that for medium-term horizons, the beta transformation can weaken the systematic effect of misspecified AJD models using options & returns.     

Competition among exchanges through simplified disclosure requirements: evidence from the American and Global Depositary Receipts

In this study, we address the ongoing debate as to whether the competition among the world's major exchanges through simplified disclosure requirements is justified. Companies from across the globe have a choice of cross-listing shares as either American or Global Depositary Receipts (ADRs and GDRs, respectively). The former are primarily listed on the US exchanges – NYSE, NASDAQ and AMEX – whereas the latter are issued into non-US markets such as the London Stock Exchange (LSE). The GDRs listed on the LSE are subject to simplified disclosure requirements compared to their exchange-listed ADR peers that have to meet more stringent compliance standards. Proponents of the ‘light touch’ approach argue that firms cross-listing as GDRs are not subject to the higher reporting costs faced by ADRs yet still face similar valuation benefits. Those who challenge this approach argue that simplified disclosure requirements set by the LSE will ultimately be recognised by the market as ineffective, diverting traders from investing in GDRs. This study provides evidence that supports the LSE's ‘light touch’ approach and shows that the benefits of information risk reduction for ADRs and GDRs are comparable. The explanation for this finding is that the two avenues through which information asymmetry is expected to be resolved after cross-listing – disclosure and analysts – are substitutive and make equally important contribution to information risk reduction, eventually leading to similar cost of capital decline for ADRs and GDRs.     

Analysts' Forecasts Following Forced CEO Changes

This paper examines analysts' earnings forecasts during the period of uncertainty following a change of chief executive officer (CEO). It distinguishes between forced and non‐forced CEO changes, and examines whether analysts utilize their information advantage to reduce the heightened uncertainty of a forced change of CEO. Examining a sample of Australian companies followed by analysts between 1999 and 2009, we find that forecasting accuracy is lower and earnings forecasts are more optimistic for firms experiencing forced CEO turnover compared to firms not undergoing such a change. However, dispersion is not statistically different. The results suggest that forced CEO turnover events provide a challenge to the forecasting environment for analysts. During CEO changes, investors should be aware that forecasts are less accurate and have an optimistic bias.     

How does investor relations disclosure affect analysts' forecasts?

We study the relationship between investor relations disclosure and analyst forecast properties in Australian firms, a setting dominated by small firms with limited analyst coverage and requiring continuous disclosure of price sensitive information. We find increasing disclosure in the time period investigated is associated with greater accuracy in firms disclosing fewer items. Disclosure was unrelated to forecast dispersion, possibly due to the low analyst following. In periods of uncertainty, the investor relations awards effectively discriminated quality from quantity of disclosure. These findings highlight the importance of active communication with analysts, particularly in firms providing less disclosure and during periods of uncertainty.