Financial restatements and sell-side analysts' stock recommendations: evidence from Malaysia

2020 ◽  
Vol 16 (4) ◽  
pp. 501-524 ◽  
Author(s):  
Ameen Qasem ◽  
Norhani Aripin ◽  
Wan Nordin Wan-Hussin
Keyword(s):  
Emerging Market ◽  
Forecast Accuracy ◽  
Earnings Forecasts ◽  
Generalized Least Squares ◽  
Least Squares Regression ◽  
Content Type ◽  
Stock Recommendations ◽  
Market Participants ◽  
Analyst Behavior ◽  
Financial Restatements

PurposeThe purpose of this paper is to examine the influence of financial restatements on the sell-side analysts' stock recommendations.Design/methodology/approachThe sample of this study is based on a dataset from a panel of 246 Malaysian public listed companies for the period 2008 to 2013 (651 company-year observations). This study employs feasible generalized least squares regression.FindingsThis study finds a negative and significant relationship between restated companies and sell-side analysts' stock recommendations, which means that sell-side analysts issue less favorable stock recommendations for restated companies.Practical implicationsThe findings based on observations from an emerging economy complement the results of the US studies that analysts revise their earnings forecasts or recommendations downwards or drop coverage following financial restatements. The results of this study should be useful to capital market participants in understanding how analysts perceive and evaluate restated companies.Originality/valueThis paper expands the literature on financial restatements consequences in an emerging market which is largely unstudied. Prior research on analyst behavior towards restatements has focused on the consequences of restatements in terms of analyst following and forecast accuracy and dispersion. This study examines if and how the restatements affect the analysts' final output as reflected in the recommendation opinion, an area that has so far received little attention.

The relationship between cross-border acquisitions and R&D investments by Indian firms – substituting or complementing

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Ajay Kumar Singal ◽  
Faisal Mohammad Ahsan
Keyword(s):  
Resource Constraints ◽  
Emerging Market ◽  
Main Idea ◽  
Generalized Least Squares ◽  
Emerging Economy ◽  
Least Squares Regression ◽  
Data Set ◽  
Content Type ◽  
Cross Border ◽  
The Relationship

PurposeEmerging economy firms seek strategic assets through cross-border acquisitions (CBAs) to upgrade their capabilities. The paper explores the relation between emerging economy firms' investments in CBAs and subsequent investments in domestic R&D. It investigates the underlying mechanism that links a firm's decision to pursue CBAs and the outcomes from the CBAs. The main idea behind the study is that firms have higher possibility of creating value from cross-border acquisitions when they simultaneously invest in domestic R&D though both investments are constrained by financial and managerial resources.Design/methodology/approachThe hypotheses are tested on a panel data set of 296 Indian firms over a period of 13 years (2003–2015). The authors use a two-stage Heckman procedure for testing their hypotheses. In the first stage, a probit model predicts the probability of a firm being a cross-border acquirer. The second stage model is estimated by a pooled-data GLS (generalized least squares) regression technique.FindingsThe authors find a nonlinear (inverted U-shaped) relationship between firm's investments in CBAs and domestic R&D. This suggests a complementary relation between investments in CBAs and a firm's domestic R&D at lower levels of investments in CBAs. At higher levels of investments in CBAs, CBA investments begin to substitute for firm's domestic R&D investments. For firms with higher international product-market experience and those operating in the hi-tech industry, the relationship between investments in CBAs and domestic R&D is complementary even at higher levels of CBA investments.Originality/valueThe study highlights the role of an emerging market firm's investment in domestic R&D as a link between the decision to invest in CBAs and related outcomes thereof. Emerging market firms face resource constraints while pursuing simultaneous investments in CBAs and R&D, but investment in R&D is essential for realizing the acquisition objectives. The authors also establish the significance of industry context and experiential learning in deciding the allocation of resources between CBAs and internal R&D.

Evaluation Markers and Mitigators in Analyst Reports in Light of Market Response to Stock Recommendations

2018 ◽  
Vol 55 (3) ◽  
pp. 310-337 ◽  
Author(s):  
Karol Marek Klimczak ◽  
Marta Dynel
Keyword(s):  
Stock Exchange ◽  
Emerging Market ◽  
Writing Skills ◽  
Professional Writing ◽  
Specific Group ◽  
Stock Recommendations ◽  
Share Prices ◽  
Analyst Behavior ◽  
Warsaw Stock Exchange

Professionals and individuals who invest in equity markets rely on financial analysts’ recommendations and reports to decide on what to invest in and when to trade. This study examines the role of two groups of communication strategies, evaluation markers and mitigators, in establishing analysts’ credibility. The sample consists of 80 reports written in Polish for companies listed on the Warsaw Stock Exchange in Poland. In this emerging market setting, where credibility is challenged by uncertainty, analysts deploy various strategies depending on the recommendation they make: “buy,” “hold,” or “sell” shares. The findings point toward a specific group of mitigators, namely subjectivization, as a means of communicating expert opinion. Regression results reveal that investors’ reaction to the publication of a recommendation to “hold” or “sell” shares, measured based on the changes in share prices, is stronger when subjectivization is used in a report. The findings carry implications for research into analyst behavior and for the development of professional writing skills.

Analyst Information Processing, Financial Regulation, and Academic Research

2009 ◽  
Vol 84 (4) ◽  
pp. 1073-1083 ◽  
Author(s):  
Mark T. Bradshaw
Keyword(s):  
Information Processing ◽  
Financial Regulation ◽  
Conflicts Of Interest ◽  
Research Question ◽  
Academic Research ◽  
Earnings Forecasts ◽  
Stock Recommendations ◽  
Market Participants ◽  
Regulatory Changes ◽  
Similarities And Differences

ABSTRACT: Changes in regulations governing capital markets always provide a rich setting for archival researchers to examine how such changes affect the behavior of market participants. Barniv et al. (2009; hereafter, BHMT) and Chen and Chen (2009; hereafter CC) examine the impacts of recently enacted regulations aimed at curbing perceived abused by sell-side analysts. There were no less than six significant regulations issued between 2000 and 2003 that affected the activities of analysts. BHMT and CC emphasize different regulations, but both predict that analysts' recommendation will be less biased as a result of the collective regulatory changes. The evidence in both studies is strong and convincing that the association between analysts' earnings forecasts and stock recommendations has changed, consistent with analysts' personal conflicts of interest having less impact on their analyses. However, the attribution of what regulation, if any, effected this change is less clear. Collectively, the similarities and differences in the studies provide a nice setting to understand how different authors approach the same research question.

Investment in outside governance monitoring and real earnings management: evidence from an emerging market

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Belal Ali Abdulraheem Ghaleb ◽  
Hasnah Kamardin ◽  
Abdulwahid Ahmed Hashed
Keyword(s):  
Earnings Management ◽  
Design Methodology ◽  
Emerging Market ◽  
Generalized Least Squares ◽  
Audit Fees ◽  
Real Earnings Management ◽  
Executive Directors ◽  
Manufacturing Companies ◽  
Content Type ◽  
High Level

PurposeThe main aim of this study is to examine the effect of investment in outside governance monitoring (IOGM), through non-executive directors' remuneration (NEDR) and external audit fees (AFEE), on real earnings management (REM) in an emerging market in the Southeast Asia region, Malaysia.Design/methodology/approachThe data comprises 1,056 observations from manufacturing companies listed on Bursa Malaysia for the four-year period, 2013 to 2016. The study tests IOGM individually and aggregately with REM. Feasible generalized least squares (FGLS) regression is used to test the hypotheses.FindingsThe results show that NEDR is negatively and significantly associated with REM. Likewise, AFEE is significantly associated with lower REM. Aggregate IOGM significantly mitigates REM. Additional tests conducted show consistent findings.Research limitations/implicationsThis evidence supports agency theory and signaling theory, that a high level of investment in governance monitoring signals a high demand for monitoring and fewer agency problems. It justifies more investment in outside scrutiny and monitoring to limit the existence of managers' opportunistic behavior in concentrated markets. This study relies on an aggregate measure of REM and focuses on manufacturing companies in Malaysia; thus, the results may not be the same using other measurements and samples.Originality/valueThe study, to the best of the researchers' knowledge, is the first to document evidence in an emerging market suggesting that higher NEDR and AFEE are individually and aggregately associated with lower REM. Policymakers, shareholders and researchers may consider investment in these two mechanisms as a proxy of high-quality monitoring that mitigates REM.

The information content of managerial insider trading: evidence from analyst forecasts

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Omar Esqueda ◽  
Thanh Ngo ◽  
Daphne Wang
Keyword(s):  
Insider Trading ◽  
Fixed Effects ◽  
Information Dissemination ◽  
Forecast Accuracy ◽  
Earnings Forecasts ◽  
Ordinary Least Squares ◽  
Content Type ◽  
Forecast Bias ◽  
Forecast Precision ◽  
Insider Trades

PurposeThis paper examines the effect of managerial insider trading on analyst forecast accuracy, dispersion and bias. Specifically, the authors test whether insider-trading information is positively associated with the precision of earnings forecasts. In addition, this relationship between Regulation Fair Disclosure (FD) and the Galleon insider trading case is examined.Design/methodology/approachPooled ordinary least squares (Pooled OLS) rregressions with year-fixed effects, firm-fixed effects, and firm-level clustered standard errors are used. Our proxies for forecast precision are regressed on alternative measures of insider trading activities and a vector of control variables.FindingsInsider-trading information is positively associated with the precision of earnings forecasts. Analysts provide better forecast accuracy, less forecast dispersion and lower forecast bias among firms with insider trading in the six months leading to the forecast issues. In addition, bullish (bearish) insider trades are associated with increased (decreased) forecast bias. Insider trading information complements analysts' independent opinion and increases the precision of their forecast.Practical implicationsRegulators may pursue rules that promote the rapid disclosure of managerial insider trades, particularly given the increasing availability of Internet tools. Securities regulators may attempt to increase transparency and enhance the reporting procedures of corporate insiders, for example, using Internet sources with direct release to the public to ensure more timely information dissemination.Originality/valueThe authors document a positive association between earnings forecast precision and managerial insider trading up to six months prior to the forecast issue. This relationship is stronger after the Securities and Exchange Commission (SEC) prohibited the selective disclosure of material nonpublic information through Regulation FD. In addition, the association between insider trading and forecast accuracy has weakened after the Galleon insider trading case.

Management Forecasts in Japan: An Empirical Study of Forecasts that Are Effectively Mandated

2009 ◽  
Vol 84 (5) ◽  
pp. 1575-1606 ◽  
Author(s):  
Kazuo Kato ◽  
Douglas J. Skinner ◽  
Michio Kunimura
Keyword(s):  
Forecast Accuracy ◽  
Earnings Forecasts ◽  
Fiscal Year ◽  
Management Forecasts ◽  
Insider Ownership ◽  
Market Participants ◽  
Earnings Surprises ◽  
History Of ◽  
Study Management ◽  
Reputation Effects

ABSTRACT: We study management forecasts in Japan, where forecasts are effectively mandated but managers have considerable latitude over the numbers they release. We find that managers' initial earnings forecasts for a fiscal year are systematically upward-biased but that they revise their forecasts downward during the fiscal year so that most earnings surprises are non-negative. Managers' initial forecast optimism is inversely related to firm performance, and is more pronounced for firms with higher levels of insider ownership, smaller firms, and firms with a history of forecast optimism. The fact that managers' forecasts tend to be consistently optimistic suggests that reputation effects are insufficient to ensure managerial forecast accuracy. We also find that the information content of managers' forecasts is related to proxies for whether market participants view the forecasts as credible.

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.

Do Analysts Practice What They Preach and Should Investors Listen? Effects of Recent Regulations

2009 ◽  
Vol 84 (4) ◽  
pp. 1015-1039 ◽  
Author(s):  
Ran Barniv ◽  
Ole-Kristian Hope ◽  
Mark J. Myring ◽  
Wayne B. Thomas
Keyword(s):  
Earnings Forecasts ◽  
Residual Income ◽  
Growth Ratio ◽  
Stock Recommendations ◽  
Negative Relation ◽  
Large Sample ◽  
Analyst Behavior ◽  
Residual Income Valuation ◽  
Current Price

ABSTRACT: From 1994 to 1998, Bradshaw (2004) finds that analysts' stock recommendations relate negatively to residual income valuation estimates (scaled by current price) but positively to valuation heuristics based on the price-to-earnings-to-growth ratio and long-term growth. These results are surprising, especially considering that future returns relate positively to residual income valuation estimates and negatively to heuristics. Using a large sample of analysts for the 1993–2005 period, we consider whether recent regulatory reforms affect this apparent inconsistent analyst behavior. Consistent with the intent of these reforms, we find that the negative relation between analysts' stock recommendations and residual income valuations is diminishing following regulations. We also show that residual income valuations, developed using analysts' earnings forecasts, relate more positively with future returns. However, we document that stock recommendations continue to relate negatively with future returns. We conclude that recent regulations have affected analysts' outputs—forecasted earnings and stock recommendations—but investors should be aware that factors other than identifying mispriced stocks continue to influence how analysts recommend stocks.

The benefit of labor cost disclosure: evidence from analyst earnings forecast accuracy

2017 ◽  
Vol 43 (5) ◽  
pp. 510-527
Author(s):  
Sangwan Kim ◽  
KoEun Park ◽  
Joshua Rosett ◽  
Yong-Chul Shin
Keyword(s):  
Forecast Accuracy ◽  
Earnings Forecasts ◽  
Labor Cost ◽  
Ordinary Least Squares ◽  
Analyst Forecast ◽  
Labor Costs ◽  
Cost Information ◽  
Content Type ◽  
Future Earnings ◽  
Earnings Components

Purpose The purpose of this paper is to investigate whether sell-side equity analysts use labor cost information when forming expectations of future earnings. The availability of disaggregated earnings components will benefit financial statement users to the extent that the additional information released by a firm is useful to infer differential persistence of disaggregated earnings components. Design/methodology/approach This paper employs ordinary least squares, logit, and two-stage Heckman (1979) regressions which test whether analysts incorporate labor cost information into their earnings forecasts after controlling for a managerial self-selection to disclose labor costs, and further test whether a firm’s decision to voluntarily disclose labor costs improves analyst forecast accuracy. Findings This research finds that analysts incorporate labor cost information into their earnings forecasts after controlling for other earnings components. More importantly, this research shows that voluntary disclosure of labor cost information is positively associated with analyst forecast accuracy. Additional tests show that the benefit of voluntary labor cost information is more pronounced for firms with high information uncertainty and for analysts with less firm-specific experience and analysts affiliated with small brokerage houses. Originality/value This paper contributes to the literatures on the effect of labor cost on investors’ behavior and on analyst-specific factors in explaining analyst ability to predict future earnings.

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.

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