Earnings Benchmarks and the Information Content of Quarterly Foreign Earnings of U.S. Multinational Companies

The meeting of earnings benchmarks is considered important for investors. The chief financial officers of U.S. companies state that the three most important earnings thresholds to meet are the earnings in the same quarter last year, the analysts' earnings forecast for the current quarter, and zero earnings. These earnings benchmarks have been defined in terms of total earnings. For U.S. multinational firms, total earnings consist primarily of domestic earnings and foreign earnings. We conduct an event study where we examine (1) the stock market reaction to meeting or beating quarterly domestic and foreign earnings benchmarks and (2) the market reaction to the changes in quarterly domestic and foreign earnings, while we control for meeting or beating the analysts' earnings forecast and the analysts' earnings forecast surprise. We find that the quarterly financial statement disclosure of domestic and foreign earnings under Statement of Financial Accounting Standards No. 131 supplies investors with valuable information that was not previously disseminated through financial analysts or other sources. The stock market reaction to meeting or beating foreign earnings from the same quarter in the prior year is stronger than the market reaction to meeting or beating domestic earnings from the same quarter in the prior year.     

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.     

Market implied future earnings and analysts’ forecasts

This study provides evidence on market implied future earnings based on the residual income valuation (RIV) framework and compares these earnings with analyst earnings forecasts for accuracy (absolute forecast error) and bias (signed forecast error). Prior research shows that current stock price reflects future earnings and that analyst forecasts are biased. Thus, how price-based imputed forecasts compare with analyst forecasts is interesting. Using different cost of capital estimates, we use the price-earnings relation and impute firms’ future annual earnings from three residual income (RI) models for up to 5 years. Relative to I/B/E/S analyst forecasts, imputed forecasts from the RI models are less or no more biased when cost of capital is low (equal to a risk-free rate or slightly higher). Analysts slightly outperform these RI models in terms of accuracy for immediate future (1 or 2) years in the forecast horizon but the opposite is true for more distant future years when cost of capital is low. A regression analysis shows that, in explaining future earnings changes, analyst forecasts relative to imputed forecasts do not impound a significant amount of earnings information embedded in current price. In additional tests, we impute future long-term earnings growth rates and find that they are more accurate and less biased than I/B/E/S analyst long-term earnings growth forecasts. Together, the results suggest that the RIV framework can be used to impute a firm’s future earnings that are high in accuracy and low in bias, especially for distant future years.     

Financial Crisis and its Asymmetric Macroeconomic Impact on Eurozone Member Countries

The purpose of the paper is to analyze the dynamics of EMU (The Economic and Monetary Union, i.e., the group of European countries who use the common currency euro) and to analyze the fallout from the recent financial and economic dynamics. Both the impact on the eurozone as a whole and on individual member countries will be evaluated. The first 11 years of Eurozone experience will be discussed and evaluated in the second section. The third section will then be devoted to analyzing the fallout from the recent financial and economic dynamics. Both the impact on the eurozone as a whole and on individual member countries will be evaluated. The last section concludes and provides some ideas for future development of eurozone.