Audit Quality and Properties of Analyst Earnings Forecasts

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.

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Abnormal Audit Fees and Audit Quality: Evidence from the Korean Audit Market

Journal of International Accounting Research ◽

10.2308/jiar-18-053 ◽

2020 ◽

Vol 19 (3) ◽

pp. 37-60

Author(s):

Matthew J. Behrend ◽

Sarfraz Khan ◽

Young Woo Ko ◽

Sung-Jin Park

Keyword(s):

Audit Quality ◽

Earnings Forecasts ◽

Audit Fees ◽

Discretionary Accruals ◽

Confounding Effect ◽

Public Firms ◽

Audit Market ◽

Analyst Earnings ◽

The Relationship ◽

Quality Evidence

ABSTRACT Do abnormally high or low audit fees reflect audit quality? In this paper, we re-examine this issue after controlling for the confounding effect of audit hours by using a sample of public firms in the Korean audit market, which publicly discloses both audit fees and audit hour information. While we do not find a significant association between abnormally high audit fees and audit quality, we find that abnormally low audit fees are associated with larger discretionary accruals and a higher likelihood of meeting or beating analyst earnings forecasts. Further, we find that the relationship between abnormally low audit fees and audit quality indicators persists regardless of the level of audit hours. To the extent that audit hours represent audit effort, these findings suggest that greater audit effort alone may not lead to higher audit quality as fee pressure from abnormally low fees may discourage the provision of high-quality audit services. JEL Classifications: M42; M48.

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The Moderating Factors on the Relationship between Analyst Earnings Forecasts and CEO Turnover

Korean Journal of Accounting Research ◽

10.21737/kjar.2017.02.22.1.1 ◽

2017 ◽

Vol 22 (1) ◽

pp. 1

Author(s):

Bum－Jin Park

Keyword(s):

Earnings Forecasts ◽

Ceo Turnover ◽

Moderating Factors ◽

Analyst Earnings ◽

The Relationship

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The Rewards for Meeting or Beating Managers' Own Earnings Guidance

Accounting Horizons ◽

10.2308/horizons-16-059 ◽

2020 ◽

Author(s):

Kai Wai Hui ◽

Alfred Z. Liu ◽

Yao Zhang

Keyword(s):

Stock Return ◽

Earnings Forecasts ◽

Earnings Guidance ◽

Cross Sectional ◽

Earnings Expectations ◽

Future Performance ◽

Management Guidance ◽

Prior Literature ◽

Management Earnings Guidance ◽

Analyst Earnings

This study documents a stock return premium for meeting or beating management's own earnings guidance (MBMG) that is separate and distinct from the premium for meeting or beating analysts' earnings forecasts (MBAF) documented in prior literature. Cross-sectional analyses reveal that the MBMG premium relative to the MBAF premium increases when management guidance is more informative. We also find that MBMG is incrementally informative about a firm's future performance after considering MBAF. Our findings suggest that investors consider management earnings guidance to be a performance threshold in addition to analyst earnings forecasts when forming earnings expectations.

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Market Reaction to Abnormal Inventory Growth: Evidence for Managerial Decision-Making

Journal of Management Accounting Research ◽

10.2308/jmar-2020-058 ◽

2021 ◽

Author(s):

Kirsten A. Cook ◽

G. Ryan Huston ◽

Michael R. Kinney ◽

Jeffery S. Smith

Keyword(s):

Earnings Management ◽

Management Strategy ◽

Earnings Forecasts ◽

Manufacturing Firms ◽

Fixed Costs ◽

Managerial Decision ◽

Managerial Decision Making ◽

Investor Confidence ◽

Analyst Earnings ◽

Market Premium

Prior research demonstrates that manufacturing firms increase production (relative to sales) to transfer fixed costs from cost of goods sold (COGS) to inventory accounts, thereby increasing income to reach or surpass earnings thresholds. We examine how the market reacts to this earnings management strategy. We find that investors respond positively to inventory growth based on an expectation of increased future sales; however, this signal is weaker for inventory manipulators. Further, the market premium from meeting or beating analyst earnings forecasts by manipulating inventory is smaller than the premium for achieving this threshold absent inventory manipulation or through accrual manipulation. Finally, we examine firms considered to be “serial” inventory manipulators, finding that the market consistently discounts earnings beats for these firms, suggesting that inventory manipulation erodes investor confidence in firms’ earnings. Collectively, our results provide new insights into a challenge facing operations managers and finance managers in manufacturing firms.

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

Journal of Accounting Auditing & Finance ◽

10.1177/0148558x9801300306 ◽

1998 ◽

Vol 13 (3) ◽

pp. 271-274 ◽

Cited By ~ 2

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]).

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