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.

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.

Discussion: “Dispersion in Analysts' Earnings Forecasts as a Measure of Uncertainty”

1998 ◽  
Vol 13 (3) ◽  
pp. 271-274 ◽  
Author(s):  
Lawrence D. Brown
Keyword(s):  
Stock Price ◽  
Annual Report ◽  
Earnings Forecasts ◽  
Analyst Forecast ◽  
Earnings Forecast ◽  
Data Set ◽  
Forecast Dispersion ◽  
Forecast Revision ◽  
Analyst Earnings ◽  
The Impact

This paper tackles an interesting question; namely, whether dispersion in analysts' earnings forecasts reflects uncertainty about firms' future economic performance. It improves on the extant literature in three ways. First, it uses detailed analyst earnings forecast data to estimate analyst forecast dispersion and revision. The contrasting evidence of Morse, Stephan, and Stice (1991) and Brown and Han (1992), who respectively used consensus and detailed analyst data to examine the impact of earnings announcements on forecast dispersion, suggest that detailed data are preferable for determining the data set on which analysts' forecasts are conditioned. Second, it relates forecast dispersion to both analyst earnings forecast revision and stock price reaction to the subsequent earnings announcement. Previous studies related forecast dispersion to either analyst forecast revision (e.g., Stickel 1989) or to subsequent stock price movements (e.g., Daley et al. [1988]), but not to both revision and returns. Third, it includes the interim quarters along with the annual report. In contrast, previous research focused on the annual report, ignoring the interims (Daley et al. [1988]).

The impact of strategic deviance on analysts’ earnings forecasts: evidence from China

2019 ◽  
Vol 10 (3) ◽  
pp. 362-381
Author(s):  
Xiqiong He ◽  
Changping Yin
Keyword(s):  
Information Asymmetry ◽  
Corporate Strategy ◽  
Forecast Error ◽  
Environmental Uncertainty ◽  
Earnings Forecasts ◽  
Financial Information ◽  
Strategic Information ◽  
Content Type ◽  
Information Transparency ◽  
The Impact

Purpose The purpose of this paper is to explore the effect of firm’s deviant strategy on analysts’ earnings forecasts and further examine the effects of firm’s information transparency and environmental uncertainty on these relationships from information asymmetry perspective. Design/methodology/approach The sample includes listed firms on Shanghai and Shenzhen Stock Exchange during the period 2007-2013. Findings The results indicate that firms’ deviant strategies have effects on analysts’ earnings forecasts, in particular, firms with extreme strategies have less analysts following, larger forecast error and dispersion compared with firms following industry norms. Moreover, information transparency and environmental uncertainty have effects on the relationship between strategic deviance and analysts’ earnings forecasts. Practical implications The empirical results of this paper provide strong evidence that strategy information is an important source of information for analysts’ earnings forecasts, which shows that analysts should pay attention to not only financial information but also the strategic information, especially when the information is related to strategic choice. In addition, it is necessary for investors to focus on strategic information to have a better understanding on financial information of enterprises and make better investment decisions. Originality/value The findings of this study indicate that corporate strategic deviance has an effect on analysts’ earnings forecasting behavior. This study enriches research studies on corporate strategy and external stakeholders and complements related research on analysts’ earnings forecasts from strategic perspective and information asymmetry perspective.

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.

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.

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.

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.

Audit Quality and Analyst Forecast Accuracy: The Impact of Forecast Horizon and Other Modeling Choices

2015 ◽  
Vol 35 (2) ◽  
pp. 167-185 ◽  
Author(s):  
Yi (Ava) Wu ◽  
Mark Wilson
Keyword(s):  
Audit Quality ◽  
Forecast Accuracy ◽  
Earnings Forecasts ◽  
Analyst Forecasts ◽  
Data Availability ◽  
Analyst Forecast ◽  
Forecast Horizon ◽  
Financial Reports ◽  
Decision Usefulness ◽  
The Impact

SUMMARY The accuracy and other properties of analyst earnings forecasts represent potentially useful proxies for the impact of audit quality on client financial reports. Extant research in the auditing literature, however, is characterized by diametrically opposite predictions and inconsistent findings regarding the relationship between audit quality and analyst forecast accuracy. We argue that a potential reason for the inconsistency in the literature reflects these studies' focus on end-of-year forecast accuracy, which is subject to competing effects of audit quality. High-quality auditors may simultaneously improve forecast accuracy through their impact on the decision usefulness of clients' prior period reports, and reduce forecast accuracy by constraining client attempts to manage earnings in the direction of the consensus forecast. We argue and present evidence in support of the conjecture that analysts' beginning-of-year forecasts are a superior metric for identifying the impact of audit quality on the properties of analyst forecasts because the decision usefulness effect of audit quality should be dominant with respect to those forecasts. Data Availability: Data are available from sources identified in the article.

The effect of integrated reporting quality on market liquidity and analyst forecast error

2020 ◽  
Vol 33 (4/5) ◽  
pp. 635-650
Author(s):  
Felipe Zúñiga ◽  
Roxana Pincheira ◽  
Julie Walker ◽  
Michael Turner
Keyword(s):  
South Africa ◽  
South African ◽  
Forecast Error ◽  
Forecast Accuracy ◽  
Market Liquidity ◽  
Analyst Forecast ◽  
Earnings Forecast ◽  
Integrated Reporting ◽  
Content Type ◽  
Practical Implications

Purpose The purpose of this study is to examine the effect of integrated reporting (IR) quality on both market liquidity and analyst forecast accuracy in South Africa as the only country in the world having IR as a listing requirement. This study uses the Sustainability Disclosure Transparency Index (SDTI) as a proxy for IR disclosure quality. The analysis of this study is based on the period after the publication of the international framework and its adoption by the International Reporting Committee of South Africa in 2014. Design/methodology/approach The companies sampled in this study are those listed on the Johannesburg Stock Exchange (JSE) from 2013 to 2015. The major factor driving the selection of this particular period was to not only analyse the existing IR practice but also investigate IR two years after King III came into force. The SDTI developed by Integrated Reporting and Assurance Services (IRAS) was used to analyse IR quality. Ordinary least squares regressions were analysed. The models include year and industry fixed effects. The variance inflation factor and its tolerance were used to test the severity of multi-collinearity. Also, alternative measures of IR quality and alternate model specifications were analysed to check the robustness of the results. Findings The authors find that quality of IR is associated with lower earnings forecast error. The evidence indicates that earnings forecast error is lower for firms in the materials sector of the South African economy. Consistent with prior research, the results also suggest that forecast errors are higher for companies with volatile returns and lower for larger firms. Additional analysis indicates that IR quality is positively associated with market liquidity. Overall, these findings support the virtues of IR, thus providing useful information to capital markets. Research limitations/implications The results obtained cannot be generalised to other jurisdictions. While the South African economy is the best setting to investigate IRs, new economies are also working actively on IR disclosures, so future research is likely to extend the literature in this field. Secondly, the availability of data constrained the sample size; however, this only mediates against finding any statistically significant result. While the IRAS database offers information about 324 JSE companies, Datastream covers only the 170 largest South African firms. In spite of the sample reduction, robust and consistent results are found in the market liquidity and analyst forecast accuracy proxies. Practical implications The sample period of this study (2013-2015) allows to understand disclosure behaviour after the international IR framework was published and endorsed by the JSE. The release of the IIRF gave clear guidance to firms regarding the nature and purpose of IR. Overall, the results obtained in this paper are consistent with IR expectations, thus providing useful information for investors and financial analysts. It is expected that the results might have practical implications for other nations about the cost and benefits of implementing integrated management reporting. Originality/value This paper contributes incrementally to the existing debate about whether disclosure information through IR has real benefits or is a passing fad. It examines the economic consequences of IR in a mandatory setting using an in-house ranking system, adapted to South Africa, designed by IRAS to determine IR quality. IRAS provides an SDTI that assesses the accuracy, consistency, completeness and reliability of quantitative data for 84 indicators based on IR and global reporting initiative aspects and subdivided into seven categories.

Benefits of management disclosure precision on analysts’ forecasts

2014 ◽  
Vol 13 (4) ◽  
pp. 371-399 ◽  
Author(s):  
Yu-Ho Chi ◽  
David A. Ziebart
Keyword(s):  
Forecast Accuracy ◽  
Earnings Forecasts ◽  
Forecast Errors ◽  
Management Earnings Forecasts ◽  
Earnings Guidance ◽  
Short Term ◽  
Content Type ◽  
Management Forecast ◽  
Forecast Precision ◽  
The Impact

Purpose – The purpose of this paper is to examine the impact of management’s choice of forecast precision on the subsequent dispersion and accuracy of analysts’ earnings forecasts. Design/methodology/approach – Using a sample of 3,584 yearly management earnings per share (EPS) forecasts and 10,287 quarterly management EPS forecasts made during the period of 2002-2007 and collected from the First Call database, the authors controlled for factors previously found to impact analysts’ forecast accuracy and dispersion and investigate the link between management forecast precision and attributes of the analysts’ forecasts. Findings – Results provide empirical evidence that managements’ disclosure precision has a statistically significant impact on both the dispersion and the accuracy of subsequent analysts’ forecasts. It was found that the dispersion in analysts’ forecasts is negatively related to the management forecast precision. In other words, a precise management forecast is associated with a smaller dispersion in the subsequent analysts’ forecasts. Evidence consistent with accuracy in subsequent analysts’ forecasts being positively associated with the precision in the management forecast was also found. When the present analysis focuses on range forecasts provided by management, it was found that lower precision (a larger range) is associated with a larger dispersion among analysts and larger forecast errors. Practical implications – Evidence suggests a consistency in inferences across both annual and quarterly earnings forecasts by management. Accordingly, recent calls to eliminate earnings guidance through short-term quarterly management forecasts may have failed to consider the linkage between the attributes (precision) of those forecasts and the dispersion and accuracy in subsequent analysts’ forecasts. Originality/value – This study contributes to the literature on both management earnings forecasts and analysts’ earnings forecasts. The results assist in policy deliberations related to calls to eliminate short-term management earnings guidance.

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