scholarly journals Brokerage trading volume and analysts’ earnings forecasts: a conflict of interest?

2021 ◽  
Author(s):  
Tiana Lehmer ◽  
Ben Lourie ◽  
Devin Shanthikumar
Keyword(s):  
Conflict Of Interest ◽  
Trading Volume ◽  
Forecast Accuracy ◽  
Earnings Forecasts ◽  
Earnings Forecast ◽  
Volume Effects

AbstractUsing unique new data, we examine whether brokerage trading volume creates a conflict of interest for analysts. We find that earnings forecast optimism is associated with higher brokerage volume, even controlling for forecast and analyst quality, recommendations, and target prices. However, forecast accuracy is also significantly associated with higher volume. When analysts change brokerage houses, they bring trading volume with them, influencing trading volume at the new brokerage. This indicates that analysts drive the volume effects we observe. Consistent with a reward for generating volume, brokerage houses are less likely to demote analysts who generate more volume. Finally, analysts strategically adjust forecast optimism based on expected volume impact. Analysts become more (less) optimistic if their optimistic forecasts in the prior year were more (less) successful at generating volume. However, consistent with higher costs to increasing accuracy, analysts do not update accuracy based on expected volume impact. Overall, our results are consistent with a brokerage trading volume conflict of interest moving analysts towards more optimistic earnings forecasts, despite the volume reward for accuracy.

The Moderating Effect of Industry Concentration on the Relations Between External Attributes and the Properties of Analyst Earnings Forecast

2013 ◽  
Vol 16 (03) ◽  
pp. 1350019 ◽  
Author(s):  
Yu-Cheng Chen ◽  
Chiung-Yao Huang ◽  
Pei-I Chou
Keyword(s):  
Forecast Accuracy ◽  
Earnings Forecasts ◽  
Moderating Effect ◽  
Industry Concentration ◽  
Earnings Forecast ◽  
Moderating Effects ◽  
Forecast Dispersion ◽  
Earnings Surprise ◽  
Using Data ◽  
Analyst Earnings

Based on the work of earlier studies, the main objective of this study is to determine whether the properties of analyst earnings forecast are related to the interaction effects of external attributes and industry concentration that were not the focus of previous research. Specifically, this study examines the relations between external attributions and the properties of analyst earnings forecasts. Furthermore, we explore the moderating effect of industry concentration on the relations between external attributions and the properties of analyst earnings forecasts. Using data from Compustat and I/B/E/S, we provide evidence that analysts' earnings forecast accuracy is lower and the forecast dispersion is larger for firms with more earnings surprise. Firms with more analysts' forecasts covering are associated with higher forecast accuracy, but not necessarily higher forecast dispersion. The moderating effects of industry concentration on the relationships between earnings surprise, the number of estimates covering the company and forecast accuracy are particularly strong. In addition, the moderating effects of industry concentration on the relationship between earnings surprise, the number of estimates covering the company and the forecast dispersion are partially supported. Overall, the industrial concentration factor either magnifies or alleviates the effect of external attributions on analyst's forecast accuracy and forecast dispersion.

scholarly journals Earnings Forecast Optimism For U.S. Vs. Non-U.S. Firms

2013 ◽  
Vol 12 (11) ◽  
pp. 1491
Author(s):  
David Salerno ◽  
Nathan Jeppson
Keyword(s):  
Task Complexity ◽  
Financial Analysts ◽  
Forecast Accuracy ◽  
Earnings Forecasts ◽  
International Investment ◽  
Growth Potential ◽  
Earnings Forecast ◽  
Level Measurement ◽  
Investment Opportunities

This study examines whether financial analysts are more optimistic in their earnings forecasts for non-U.S. firms than they are for U.S. firms. Several areas of research motivate this examination. First, research shows that global economic influences, such as economic downturns and the desire to increase the international content of portfolios, encourage investors to seek out international investment opportunities in new markets. Second, literature also reveals that emerging markets provide superior growth potential; however, analyzing such firms could introduce task complexity which research finds to be associated with lower forecast accuracy. Finally, research shows that financial analysts cover firms of which they have a favorable opinion. Therefore, because of this literature, it is reasonable to expect that analysts make more optimistic forecasts (over-estimate errors) of the earnings potential of the non-U.S. firms that they choose to follow vs. U.S. firms. Using a summary level measurement of forecast optimism, the authors find that analysts forecasts are more optimistic for non-U.S. firms over both short and long-term horizons. In analyst-level tests, it was found that individual analysts produce more optimistic forecasts for non-U.S. firms in relation to their peers in the long-term; however, that optimism is reduced under short horizons. As portfolios become more internationally diversified, the result of this study will be useful to investors seeking analyst guidance about international investment opportunities.

Audit Quality and Properties of Analyst Earnings Forecasts

2008 ◽  
Vol 83 (2) ◽  
pp. 327-349 ◽  
Author(s):  
Bruce K. Behn ◽  
Jong-Hag Choi ◽  
Tony Kang
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Forecast Accuracy ◽  
Reporting Quality ◽  
Earnings Forecasts ◽  
Earnings Forecast ◽  
Forecast Dispersion ◽  
Industry Specialization ◽  
Big 5 ◽  
Analyst Earnings

Under the assumption that audit quality relates positively to unobservable financial reporting quality, we investigate whether audit quality is associated with the predictability of accounting earnings by focusing on analyst earnings forecast properties. The evidence shows that analysts' earnings forecast accuracy is higher and the forecast dispersion is smaller for firms audited by a Big 5 auditor. We further find that auditor industry specialization is associated with higher forecast accuracy and less forecast dispersion in the non-Big 5 auditor sample but not in the Big 5 auditor sample. Overall, our results suggest that high-quality audit provided by Big 5 auditors and industry specialist non-Big 5 auditors is associated with better forecasting performance by analysts.

The informativeness of impression management − financial analysts and rhetorical style of CEO letters

2019 ◽  
Vol 31 (3) ◽  
pp. 462-496 ◽  
Author(s):  
Beibei Yan ◽  
Walter Aerts ◽  
James Thewissen
Keyword(s):  
Impression Management ◽  
Financial Analysts ◽  
Forecast Accuracy ◽  
Earnings Forecasts ◽  
Earnings Forecast ◽  
Management Communication ◽  
Self Presentation ◽  
Content Type ◽  
Rhetorical Features ◽  
Occurrence Patterns

Purpose This paper aims to investigate the informativeness of rhetorical impression management patterns of CEO letters and examines whether these rhetorical features affect financial analysts’ forecasting behaviour. Design/methodology/approach The authors use textual analysis on a sample of 526 CEO letters of US firms and apply factor analysis on individual linguistic style measures to identify co-occurrence patterns of style features. Findings The authors identify three holistic style patterns (assertive acclaiming, cautious plausibility-based framing and logic-based rationalizing) and find that assertive rhetorical feature in CEO letters is negatively related with the dispersion of financial analysts’ earnings forecasts and positively associated with earnings forecast accuracy. CEOs’ use of a rationalizing rhetorical pattern tends to decrease the dispersion of financial analysts’ earnings, whereas a cautious plausibility-based rhetorical position is only marginally instrumental in getting more accurate earnings predictions. Practical implications Whilst impression management communication is often theorized as manipulative and void of real information content, the findings suggest that impression management serves both self-presentation and information-sharing purposes. Originality/value This paper elaborates on the co-occurrence of style characteristics in management communication and is a first attempt to validate the external ramifications of holistic style profiles of corporate narratives by focusing on an economic target audience.

Absolute Forecast Errors of Earnings in Malaysian IPO Prospectuses: The Impact of Ethnic Diversity

2014 ◽  
Vol 68 (3) ◽  
Author(s):  
Mohammed Abdullah Ammer ◽  
Nurwati A. Ahmad-Zaluki
Keyword(s):  
Ethnic Diversity ◽  
Boards Of Directors ◽  
Forecast Error ◽  
Forecast Accuracy ◽  
Earnings Forecasts ◽  
Ordinary Least Squares ◽  
Audit Committees ◽  
Earnings Forecast ◽  
Forecast Errors ◽  
The Impact

The main focus of this paper is the earnings forecast, a vital information included in IPO prospectus. Specifically, our paper examined the impact of ethnic diversity groups on the boards of directors and audit committees in terms of earnings forecast accuracy. We are motivated by the lack of prior studies related to investigating IPO earnings forecast. Cross-sectional Ordinary Least Squares (OLS) modeling was conducted on 190 Malaysian IPOs from 2002 to 2012. For the evaluation of earnings forecast accuracy, we mathematically used the metric of Absolute Forecast Error (AFER). Moreover, for the test of robustness, we used the metric of Squared Forecast Error (SQFER) as error measurement, as it mostly deals with large errors. The empirical results indicate that the ethnic diversity groups on boards and audit committees have an impact on the accuracy of earnings forecasts. However, the evidence is significant for Chinese and Malay serving on boards but insignificant in terms of Chinese and Malay serving on audit committee. The findings indicate that multi-ethnic groups in Malaysian IPO companies could hinder the capability of IPO companies to achieve accurate earnings forecasts in their prospectuses.

scholarly journals Are Analysts Overoptimistic about the Prospects of Sin Firms?

2017 ◽  
Vol 8 (4) ◽  
pp. 99 ◽  
Author(s):  
Jin Zhang ◽  
Haeyoung Shin
Keyword(s):  
Stock Price ◽  
Forecast Accuracy ◽  
Earnings Forecasts ◽  
Positive Association ◽  
Negative Association ◽  
Analyst Forecast ◽  
Earnings Forecast ◽  
Absolute Value ◽  
Forecast Bias ◽  
The Difference

We investigate the association between the bias and accuracy of consensus analysts’ earnings forecasts and whether a firm is a sin firm or not. We measure analyst forecast bias as the difference between the consensus earnings forecast and the actual earnings, scaled by the stock price. We measure analyst forecast accuracy as the negative of the absolute value of the difference between the firms’ forecasted and actual earnings, scaled by the stock price. We find a positive association between the level of forecast optimism and sin firm membership. We find a negative association between the level of forecast accuracy and sin firm membership. Overall, these results imply that analysts tend to issue over-optimistic and less accurate earnings forecasts on sin firms.

scholarly journals Alternative Disclosure Methods For Accounting Changes And Analysts Earnings Forecasts

2011 ◽  
Vol 12 (3) ◽  
pp. 48 ◽  
Author(s):  
Thomas A. Buchman ◽  
C. Patrick Fort
Keyword(s):  
Forecast Accuracy ◽  
Cumulative Effect ◽  
Earnings Forecasts ◽  
The Other ◽  
Alternative Methods ◽  
Earnings Forecast ◽  
Forecast Errors ◽  
Generally Accepted Accounting Principles ◽  
Accounting Principles ◽  
Accounting Changes

<span>Generally accepted accounting principles (GAAP) require that firms changing accounting principles must report the change in one of three ways: the cumulative effect method, the retroactive restatement method, or a no-adjustment (prospective) method. The method a company should use is determined by the type of change being made. This raises the following question: can it be demonstrated that one of these methods is better, in some sense, than the other methods? A major problem in evaluating alternative methods of accounting of the same economic event and in deciding which one method should be adopted as GAAP is that it is impossible to objectively determine which of the alternatives is best. However, it is possible to rank alternatives on one dimension of interest-which method minimizes the income forecasts in years after the change. We obtained a sample of forms making accounting changes and formed three portfolios of firms based on the method they used to account for the change in accounting principle. We then compared financial analysts earnings forecast errors for the firms in the three portfolios. After controlling for relevant variables, we found that, in the year firms made accounting changes the firms making the changes requiring retroactive restatement had significantly larger forecast errors than the firms making changes requiring the other forms of disclosure, but in years subsequent to the year of change there were no significant differences in forecast errors. This leads us to the conclusion that, from an earnings forecast accuracy perspective, there is no advantage to calculating and presenting the cumulative effect of an accounting change or in preparing restated or pro-forma financial statements.</span>

scholarly journals An Investigation Of The Impact Of Degree Of IFRS Implementation On The Comparative Accuracy And Bias Of Equity Securities Analysts East And West European Firms Earnings Forecasts

2011 ◽  
Vol 24 (4) ◽  
Author(s):  
Arsen Djatej ◽  
Grace Gao ◽  
Robert H.S. Sarikas ◽  
David L. Senteney
Keyword(s):  
Forecast Accuracy ◽  
Earnings Forecasts ◽  
Earnings Forecast ◽  
East European ◽  
Securities Analysts ◽  
Specific Degree ◽  
Country Specific ◽  
West European ◽  
Ifrs Implementation ◽  
Equity Securities

<p class="MsoBodyText3" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">This research investigates the comparative impact of country specific degree of IFRS implementation upon the accuracy and bias of West European and East European firms equity securities analysts earnings forecasts for 29 European countries 12 of which are characterized as being East European.<span style="mso-spacerun: yes;">&nbsp; </span>We utilize measures of equity securities analysts earnings forecast accuracy and bias in making comparisons of the impact of country specific degree of IFRS implementation upon the statistical properties of earnings forecasts for firms having domiciles in East European and West European countries.<span style="mso-spacerun: yes;">&nbsp; </span>Our results indicate that (1) analysts earnings forecast accuracy and earning forecast bias decreases in the sense that their association with magnitudes earnings changes decreases in relation with country specific degree of implementation of IFRS and (2) the degree of reduction in analysts earnings forecast accuracy and bias is statistically more pronounced for East European firms than for West European Firms.<span style="mso-spacerun: yes;">&nbsp; </span>Our results persist after controlling for cross-listing of ADRs on US securities exchanges.<span style="mso-spacerun: yes;">&nbsp;&nbsp; </span>Bases upon this evidence we conclude that the benefits of implementation of IFRS is marginally greater for East European firms that for West European firms.</span></span></p>

Types of politically connected firms and analysts' earnings forecast

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Khairul Anuar Kamarudin ◽  
Wan Adibah Wan Ismail ◽  
Iman Harymawan ◽  
Rohami Shafie
Keyword(s):  
Information Asymmetry ◽  
Boards Of Directors ◽  
Forecast Accuracy ◽  
Earnings Forecasts ◽  
Analyst Forecast ◽  
Earnings Forecast ◽  
Content Type ◽  
Thomson Reuters ◽  
Different Types ◽  
The Impact

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.

I/B/E/S Reported Actual EPS and Analysts' Inferred Actual EPS

2012 ◽  
Vol 88 (3) ◽  
pp. 853-880 ◽  
Author(s):  
Lawrence D. Brown ◽  
Stephannie Larocque
Keyword(s):  
Majority Rule ◽  
Forecast Accuracy ◽  
Earnings Forecasts ◽  
Analyst Forecast ◽  
Earnings Forecast ◽  
Sample Period ◽  
Forecast Dispersion ◽  
Forecast Revisions ◽  
Earnings Surprises ◽  
Analyst Earnings

ABSTRACT Users of I/B/E/S data generally act as if I/B/E/S reported actual earnings represent the earnings analysts were forecasting when they issued their earnings estimates. For example, when assessing analyst forecast accuracy, users of I/B/E/S data compare analysts' forecasts of EPS with I/B/E/S reported actual EPS. I/B/E/S states that it calculates actuals using a “majority rule,” indicating that its actuals often do not represent the earnings that all individual analysts were forecasting. We introduce a method for measuring analyst inferred actuals, and we assess how often I/B/E/S actuals do not represent analyst inferred actuals. We find that I/B/E/S reported Q1 actual EPS differs from analyst inferred actual Q1 EPS by at least one penny 39 percent of the time during our sample period, 36.5 percent of the time when only one analyst follows the firm (hence, this consensus forecast is based on the “majority rule”), and 50 percent of the time during the last three years of our sample period. We document two adverse consequences of this phenomenon. First, studies failing to recognize that I/B/E/S EPS actuals often differ from analyst inferred actuals are likely to obtain less accurate analyst earnings forecasts, smaller analyst earnings forecast revisions conditional on earnings surprises, greater analyst forecast dispersion, and smaller market reaction to earnings surprises than do studies adjusting for these differences. Second, studies failing to recognize that I/B/E/S EPS actuals often differ from analyst inferred actuals may make erroneous inferences.

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