Security Analysts' Career Concerns and Herding of Earnings Forecasts

This paper examines the effect of managers’ career concerns on the precision of management earnings forecasts. We find evidence that market responses are significantly negative when earnings realizations are outside the range of managers’ earnings forecasts, especially when the realized earnings fall outside the lower bound of the forecast range. To the extent that stock price reactions reflect market assessments of managers’ ability, this evidence suggests that providing narrow-range (i.e., high-precision) forecasts can increase career-related costs. We thus hypothesize that CEOs who are more concerned about market assessments of their ability and hence about their career prospects have greater incentives to widen forecast ranges to avoid negative market assessments. Consistent with this hypothesis, we find that short-tenured CEOs and non-founders provide earnings forecasts less precisely than long-tenured CEOs and founders do.

A recent Journal of Applied Business Research article by Sheikholesami, Wilson and Slevin (1998) examined the accuracy of security analysts' earnings forecasts for CEO change firms relative to a control group.  The authors applied ANOVA on Value Line percentage forecast error measures and found "marginally significant" results indicating "that precision improved more for CEO change firms than for control firms."  Doran (1998) tests for superior methods when scrutinizing forecast error.  He finds percentage forecast error data to be severely non-normal, and demonstrates that nonparametric tests based upon ranks are superior to parametric methods.  If analysts' earnings forecast precision actually improves more for CEO change firms, test results should be stronger using rank values instead of discrete percentage error measures.

Mikhail, Walther, and Willis examine whether security analysts improve their performance with experience. They investigate four related questions: (1) Do analysts' forecasts of earnings for a company become more accurate as their experience in following the company increases? (2) Does the market place greater weight on the forecasts from experienced analysts than on those from less experienced analysts in forming its expectation of earnings? (3) Are revisions of stock recommendations from more experienced analysts more profitable than those from less experienced analysts? (4) Is the immediate market response to the issuance of revisions of stock recommendations greater for revisions from experienced analysts? Whether analyst performance improves with experience is related to whether there are consistently O'Brien [1990] and Butler and Lang [1991] find no evidence to suggest that these exist, while Sinha, Brown, and Das [1997] find indications that some analysts consistently outperform the rest. Documenting that performance improves with experience suggests that at least some experienced analysts would eventually become superior analysts. Security analysts' forecasts of earnings and their stock recommendations provide a good setting to examine the influence of experience on performance because performance can be objectively measured. In addition, since the identity of the analyst and the dates on which the

Measuring the Career Concerns of Security Analysts: Job Separations, Stock Coverage Assignments and Brokerage House Status

Keeping an Eye on the Competition Observational Learning in Analysts’ Forecasts

Stock Market Efficiency with Respect to a New Measure of Earnings News

Bank-Firm Relationhips and Security Analyst Activities: Evidence from Japan

PurposeThe purpose of this paper is to investigate the effect of non-articulation on analyst earnings forecast quality. The authors look for evidence on the relationship between non-articulation and analyst earnings forecast properties: forecast inaccuracy, forecast dispersion and forecast bias.Design/methodology/approachThe empirical tests are primarily based analyst earnings and cash flow forecasts covered by Institutional Broker Estimate System and financial statement information obtained from Compustat North America database.FindingsThe authors hypothesize and find that non-articulation is positively related to analyst forecast dispersion, forecast accuracy and forecast bias for one-year ahead of earnings. The effects of non-articulation on analyst earnings forecast inaccuracy and bias are neutralized when the analyst issues a cash flow forecast and when such forecast provides accurate information regarding the forecasted firm’s operating cash flow. On the other hand, cash flow forecast issuance alone does not mitigate the negative influence of non-articulation.Research limitations/implicationsThe sample selection procedure limits the generalizability of the findings.Practical implicationsThe findings confirm CFA Institute and prior research asserting that non-articulation deteriorates the quality of earnings forecasts by financial statement users (more specifically, the financial analysts). The authors add to the literature by documenting that accurate cash flow forecasts help analysts mitigate the negative influence of non-articulation on earnings forecast quality.Originality/valueIt remains an empirical question whether non-articulation between the balance sheet and the statement of cash flows has an effect on financial statement users’ ability to assimilate financial information. The paper highlights the detrimental effect of non-articulation by documenting the relationship between the non-articulation and the quality of earnings expectation.

Banks play a critical role in corporate governance in many economies around the world. This paper empirically compares the activities of security analysts (i.e., analyst coverage, forecast accuracy and forecast agreement) between firms with and without close working relationships with their banks in order to gain insights into how bank-firm relationships affect the information environments for capital market investors. Close bank-firm relationships signal the banks’ positive evaluation of the firms because the banks screen the firms before entering or extending the relationships. Further, during the relationships, the banks monitor these firms. Thus, capital market investors are less motivated to scrutinize the firms, thereby demand less information. Investigating Japanese firms, we document that security analysts’ forecasts are less accurate and less agreed (i.e., more dispersed) for the firms with long-established relationships with banks. Likewise, analyst coverage, forecast accuracy and forecast agreement are all lower for the firms with a larger amount of loans (i.e., private debt). The associations between bank-firm relationships and security analyst activities hold after controlling for the potential correlated variables (i.e., capital market financing, performance volatility, financial distress, cross-holding).

The spillover effect of regulatory penalties on management and analysts’ earnings forecasts: Empirical evidence based on directors networks in China

PurposeThis study examined the effect of different types of politically connected (PCON) Malaysian firms on analysts' forecast accuracy and dispersion.Design/methodology/approachThe study identified different types of PCON firms according to Wong and Hooy's (2018) classification, which divided political connections into government-linked companies (GLCs), boards of directors, business owners and family members of government leaders. The sample covered the period 2007–2016, for which earnings forecast data were obtained from the Institutional Brokers' Estimate System (IBES) database and financial data were extracted from Thomson Reuters Fundamentals. We deleted any market consensus estimates made by less than three analysts and/or firms with less than three years of analyst forecast information to control for the impact of individual analysts' personal attributes.FindingsThe study found that PCON firms were associated with lower analyst forecast accuracy and higher forecast dispersion. The effect was more salient in GLCs than in other PCON firms, either through families, business ties or boards of directors. Further analyses showed that PCON firms—in particular GLCs—were associated with more aggressive reporting of earnings and poorer quality of accruals, hence providing inadequate information for analysts to produce accurate and less dispersed earnings forecasts. The results were robust even after addressing endogeneity issues.Research limitations/implicationsThis study found new evidence of the impact of different types of PCON firms in exacerbating information asymmetry, which was not addressed in prior studies.Practical implicationsThis study has a significant practical implication for investors that they should be mindful of high information asymmetry in politically connected firms, particularly government-linked companies.Originality/valueThis is the first study to provide evidence of the impact of different types of PCON firms on analysts' earnings forecasts.

Common Factors in Analysts’ Earnings Revisions: The Role of Changing Economic Conditions

Traditional audit reports express audit opinions only by standardized texts, which makes them lack of value. In December 2016, the Ministry of Finance issues 12 new auditing standards, which include Communication of Key Audit Matters in the Independent Audit Reports, aiming to improve the information of audit reports and to reduce the information gap between companies and investors. A+H share listed companies are required to implement the new auditing standards from January 1, 2017. Many scholars study the impact of the new auditing standards on audit report users, such as investors, auditors, etc. (Louis-Philippe, et al., 2014; Christensen, et al., 2014; Wang and Li, 2019). Compared with general report users, analysts as information seekers and interpreters of the capital market (Chen and Liu, 2017), are more professional and sensitive to accounting and auditing information. Due to the high cost of private information acquisition for majority analysts, public information, such as annual reports and audit reports, is the primary source of information. The new auditing standards require auditors to disclose more audit information, especially the disclosure of key audit matters. It improves the information environment of the capital market by increasing the disclosure of the select reason of key audit matters, how to deal with them and the specific audit procedures. Then, can the implementation of the new auditing standards improve the information environment of the capital market by requiring auditors to provide more audit information, which in turn affects the accuracy of analysts’ earnings forecast? Based on the differences in the time and scope of the implementation of the new auditing standards, we use a difference-in-differences model to study the impact of the implementation of the new auditing standards on the accuracy of analysts’ earnings forecast. The study finds that the implementation of the new auditing standards improve the accuracy of analysts’ earnings forecast at the firm level, and the more key audit matters are disclosed in audit reports, the more significant this effect is. Further analysis shows that: (1) The implementation of the new auditing standards mainly reduces analysts’ optimistic bias forecast. (2) The implementation of the new auditing standards improves analysts’ earnings forecast accuracy at the individual level. (3) The implementation effect of the new auditing standards is more significant in companies with low information transparency. The contributions of this paper are as follows: (1) Using the exogenous event of auditing standard reform, this paper confirms that institutional changes can improve the information environment of the capital market, and further improves the accuracy of analysts’ earnings forecast, which enriches the relevant literature on the influencing factors of analysts’ behaviors (Bradshaw, et al., 2010; Wang and Wang, 2012). (2) This paper provides new empirical evidence on the policy effect of the implementation of the new auditing standards (Lu and Zhang, 2018; Wang, et al., 2018; Wang and Li, 2019), and responds to Defond and Zhang (2014) for the awareness of new audit reports and their value. (3) The documents on analysts are lack of study at the individual level, while this paper provides an analysis of heterogeneity at the individual level, which complements the research on individual analysts and their predictive behaviors. (4) This paper gives a positive evaluation of the new auditing standards’ implementation effect, and provides references and suggestions for the follow-up improvement of the auditing standards. This paper verifies the impact of the implementation of the new auditing standards on the information environment of the capital market. It has some implications for policy-makers and analysts. On the one hand, the conclusions of this paper are helpful for policy-makers to evaluate the policy effect of the new auditing standards. On the other hand, there are some implications for analysts. First, improve the ability of analysts themselves, so as to enhance the influence of analysts in the capital market. Second, strengthen the overall construction of the analyst industry, enhance the overall capacity of the industry, and ensure the healthy development of the analyst industry.

This paper examines whether earnings predictability would affect managerial decisions in the voluntary disclosure of non-financial information about business strategies and future plans. Specifically, the study investigates whether the accuracy of analysts' earnings forecasts is associated with the extent of managers' voluntary disclosure of strategic operating information (SOI). The empirical results show that managers of firms with greater analysts' forecast errors are more likely to voluntarily disclose strategic operating information. It is also found that enhanced SOIs are associated with improvement in forecast accuracy. The findings support the conjecture that firms whose earnings are difficult to accurately predict are more inclined to use SOI for investor communication.

This paper examines the association between property-casualty insurer accruals quality and analysts' earnings forecasts (i.e., accuracy and dispersion of forecasts). Using insurer-specific accruals, loss reserves, we calculate accruals quality which can be decomposed into its innate and discretionary components. Our results provide evidence that higher accruals quality - as measured by lower standard deviation of loss reserve errors - is positively associated with analysts' forecast accuracy. In other words, our results suggest that analysts provide less accurate forecasts for firms with higher reserve error volatility. Also, we show that lower accruals quality is associated with higher forecast dispersion indicating more disagreement among analysts. Our results hold consistent with decomposed components of accruals, innate and discretionary, and conclude that both managerial discretion and basic operations of firms affect insurers analysts' earnings forecasts.