The Effect of Analyst Forecasts during Earnings Announcements on Investor Responses to Reported Earnings

2016 ◽  
Vol 92 (3) ◽  
pp. 239-263 ◽  
Author(s):  
Gerald J. Lobo ◽  
Minsup Song ◽  
Mary Harris Stanford
Keyword(s):  
Negative Impact ◽  
Earnings Announcements ◽  
Analyst Forecasts ◽  
Analyst Forecast ◽  
Management Forecasts ◽  
Cross Sectional ◽  
Earnings Response Coefficients ◽  
Forecast Revisions ◽  
Unexpected Earnings ◽  
Earnings Response

ABSTRACT Despite the increased frequency of analyst forecasts during earnings announcements, empirical evidence on the interaction between the information in the earnings announcement and these forecasts is limited. We examine the implications of reinforcing and contradicting analyst forecast revisions issued during earnings announcements (days 0 and +1) on the market response to unexpected earnings. We classify forecast revisions as reinforcing (contradicting) when the sign of analyst forecast revisions agrees (disagrees) with the sign of unexpected earnings. We document larger (smaller) earnings response coefficients for announcements accompanied by reinforcing (contradicting) analyst forecast revisions. Analyses of management forecasts suggest that analyst revisions and management forecasts convey complementary information. Cross-sectional tests show that investors react more to earnings announcements accompanied by analyst forecast revisions when there is greater consensus among analysts (lower dispersion) and that better earnings quality (higher persistence) mitigates the negative impact of contradictory analyst forecast revisions. JEL Classifications: D82; G29; M41.

Accounting Methods and Differential Stock Market Response to the Announcement of Earnings

1993 ◽  
Vol 8 (3) ◽  
pp. 221-246 ◽  
Author(s):  
Morton Pincus
Keyword(s):  
Stock Market ◽  
Earnings Announcements ◽  
Empirical Support ◽  
Order Effect ◽  
Cross Sectional ◽  
Market Reactions ◽  
Earnings Response Coefficients ◽  
Earnings Response ◽  
Reported Earnings ◽  
Stock Market Reactions

The objective of this study is to assess the extent to which previously documented cross-sectional differences in stock market responses to earnings announcements are associated with firms' in-place voluntary accounting method choices. The possibility that managers may manage reported earnings via the choice of accounting policies provides a motivation for the study. Some conjectures about differences in “noise” in earnings signals generated under alternative accounting methods are developed and tested by estimating firm-specific earnings response coefficients. Both individual method choices (e.g., LIFO versus FIFO) and accounting method portfolios (conservative versus liberal sets of depreciation, inventory, and investment tax credit accounting alternatives) are examined. Overall there is little empirical support for the proposition that voluntary accounting method choices have a pervasive first-order effect on stock market reactions to earnings announcements.

Information Technology Capability, Management Forecast Accuracy, and Analyst Forecast Revisions

2018 ◽  
Vol 32 (3) ◽  
pp. 49-70 ◽  
Author(s):  
Feiqi Huang ◽  
He Li ◽  
Tawei Wang
Keyword(s):  
Forecast Accuracy ◽  
Analyst Forecast ◽  
Management Forecasts ◽  
Forecast Revisions ◽  
It Capability ◽  
Management Forecast ◽  
Prior Literature ◽  
Technology Capability ◽  
Information Technology Capability ◽  
The Relationship

SYNOPSISPrior literature has firmly established the relationship between IT capability and firm performance. In this paper, we extend the research in this field and investigate (1) whether IT capability contributes to management forecast accuracy, and (2) whether IT capability improves the informativeness of management forecasts and enhances the extent to which analysts incorporate management forecasts in their revisions. Using firms listed on InformationWeek 500 as our high IT capability group, we empirically demonstrate that firms with high IT capability are able to increase management forecast accuracy, and that analysts incorporate more information from management forecasts in their revisions if the firm has high IT capability.

Analysts' Motives for Rounding EPS Forecasts

2012 ◽  
Vol 87 (6) ◽  
pp. 1939-1966 ◽  
Author(s):  
Patricia M. Dechow ◽  
Haifeng You
Keyword(s):  
Earnings Announcements ◽  
Investment Banking ◽  
Earnings Response Coefficients ◽  
Economic Significance ◽  
Earnings Response ◽  
Banking Business

ABSTRACT We investigate analysts' motives for rounding annual EPS forecasts (placing a zero or five in the penny location of the forecast). We first show that an intuitive reason for analysts to engage in rounding is in circumstances where the penny digit of the forecast is of less economic significance. By rounding, analysts reveal that their forecasts are not intended to be precise to the penny. We also show that analyst incentives impact the likelihood of rounding. Specifically, we predict that analysts will exert less effort forecasting earnings for firms that generate less brokerage or investment banking business since such firms create less value for the analysts' employers. As a consequence of this reduced effort and attention, the analyst will be more uncertain about the penny digit of the forecast and so will round. Our results are consistent with this prediction. One implication of our findings is that a rounded forecast is a simple and easily observable proxy for a more noisy measure of the market's expectation of earnings. Consistent with this implication, we show that rounded forecasts bias down earnings response coefficients at earnings announcements.

The Valuation Consequence of Accounting Changes: A Multi-Year Examination

1993 ◽  
Vol 8 (4) ◽  
pp. 475-494 ◽  
Author(s):  
Bala G. Dharan ◽  
Baruch Lev
Keyword(s):  
Stock Returns ◽  
Positive Impact ◽  
Abnormal Returns ◽  
Cross Sectional ◽  
Earnings Response Coefficients ◽  
Financial Variables ◽  
Ex Post ◽  
Earnings Response ◽  
Accounting Changes

We examine the valuation impact of changes in the accounting procedures and estimates underlying reported financial data in the year of the change as well as in the postchange years. Since most accounting changes have undisclosed effect on financial variables in subsequent years in addition to the earnings impact disclosed in the year of the change, an accounting change might be motivated by its long-term valuation effect, even if investors are cognizant of the initial earnings impact and fully account for it in the year of the change. This conjecture is empirically examined for the first time in this study. Our tests are based on a cross-sectional examination of the valuation impact of the earnings effect of accounting changes in the year of the change and a longitudinal examination of the behavior of returns in the postchange years. We also provide descriptive evidence indicating that earnings management is a managerial motive for changing accounting techniques. Cross-sectionally, for income-increasing accounting changes, our results show that investors' valuations seem to reflect a concern for the reduced quality of earnings, as reflected by smaller earnings response coefficients and R2s. However, the decline is not attributable specifically to the earnings effect of the accounting change. Similarly, the earnings effect of income-decreasing changes does not have valuation impact in the year of the accounting change. Although investors appear to largely ignore the accounting changes in the year they are made, our longitudinal test does show that firms undertaking accounting changes experience different long-term returns relative to other firms in the postchange period. However, income-increasing accounting changes are associated with negative valuation changes in the postchange period, rather than the positive impact expected from the conjecture stated above. Over the five years following the year of the accounting change, abnormal returns of income-decreasing firms exceed those of income-increasing firms substantially, with the latter firms experiencing large negative returns over the period. We demonstrate a trading rule that, ex post, exploits the information contained in the accounting changes to yield large abnormal stock returns. The results suggest that income-increasing accounting changes are perhaps the first visible sign indicating other hidden, fundamental problems that get revealed in subsequent years.

The Effect of Risk on Price Responses to Unexpected Earnings

2005 ◽  
Vol 20 (4) ◽  
pp. 461-482 ◽  
Author(s):  
Dennis J. Chambers ◽  
Robert N. Freeman ◽  
Adam S. Koch
Keyword(s):  
Empirical Work ◽  
Systematic Risk ◽  
Empirical Support ◽  
Total Risk ◽  
Earnings Response Coefficients ◽  
Valuation Model ◽  
Unexpected Earnings ◽  
Earnings Response ◽  
Increasing Function

We investigate the possibility that earnings response coefficients (ERCs) are increasing in total risk (i.e., the sum of systematic and unsystematic risk). Our study extends the investigation of the role of risk in returns-earnings relations initiated by Easton and Zmijewski (1989) and Collins and Kothari (1989). Using the standard valuation model in which expected dividends are discounted at risk-adjusted rates, those studies show that ERCs should decline with systematic risk because the present value of a revision in expected dividends declines as systematic risk increases. We refer to this possibility as the “denominator effect” of risk on ERCs. In contrast, we posit a “numerator effect” of risk on ERCs. Specifically, we suggest that ERCs may increase with total risk because the sensitivity of dividend expectations to firm-specific news is an increasing function of risk. Our empirical work finds a robust positive relation between ERCs and total risk that is both economically and statistically significant; however, we find little empirical support for a negative relation between ERCs and systematic risk.

Analyst Forecast Revisions and Market Price Discovery

2003 ◽  
Vol 78 (1) ◽  
pp. 193-225 ◽  
Author(s):  
Cristi A. Gleason ◽  
Charles M. C. Lee
Keyword(s):  
Price Discovery ◽  
Market Price ◽  
Price Adjustment ◽  
Adjustment Process ◽  
Analyst Forecast ◽  
Wall Street ◽  
Cross Sectional ◽  
Analyst Coverage ◽  
Forecast Revisions ◽  
New Information

We document several factors that help explain cross-sectional variations in the post-revision price drift associated with analyst forecast revisions. First, the market does not make a sufficient distinction between revisions that provide new information (“high-innovation” revisions) and revisions that merely move toward the consensus (“low-innovation” revisions). Second, the price adjustment process is faster and more complete for “celebrity” analysts (Institutional Investor All-Stars) than for more obscure yet highly accurate analysts (Wall Street Journal Earnings-Estimators). Third, controlling for other factors, the price adjustment process is faster and more complete for firms with greater analyst coverage. Finally, a substantial portion of the delayed price adjustment occurs around subsequent earnings-announcement and forecast-revision dates. Collectively, these findings show that more subtle aspects of an earnings revision signal can hinder the efficacy of market price discovery, particularly in firms with relatively low analyst coverage, and that subsequent earnings-related news events serve as catalysts in the price discovery process.

scholarly journals Attention to dividends, inattention to earnings?

2021 ◽  
Author(s):  
Charles G. Ham ◽  
Zachary R. Kaplan ◽  
Steven Utke
Keyword(s):  
Earnings Management ◽  
Trading Volume ◽  
Accounting Information ◽  
Analyst Forecasts ◽  
Firm Valuation ◽  
Earnings Response Coefficients ◽  
Earnings Information ◽  
Earnings Response ◽  
Cash Reserves ◽  
Supply Information

AbstractWe examine whether dividends serve as substitutes or complements to accounting information in firm valuation. Consistent with dividends substituting for earnings information, we find that dividend paying firms have 11%–15% lower earnings response coefficients (ERCs) than non-payers. We find more substitution when the dividend provides a stronger signal of permanent earnings: when the firm is less likely to cut the dividend, when the firm is likely to fund the dividend out of earnings rather than cash reserves, or when the dividend is larger. We then show that dividend payers have lower absolute returns, less trading volume, and fewer analyst forecasts at the earnings announcement (EA), suggesting that dividend payers attract less attention to their less informative EAs. Finally, we show that the lower EA attention translates into less earnings management and fewer earnings-related disclosures for dividend payers relative to non-payers. Collectively, this evidence suggests that dividends supply information about permanent earnings and, although costly, could be an efficient way for some firms to satisfy investors’ demand for earnings information.

Cross-quarter differential market reactions

2016 ◽  
Vol 28 (2) ◽  
pp. 219-235
Author(s):  
Andrew Lee ◽  
Chu Yeong Lim ◽  
Tracey Chunqi Zhang
Keyword(s):  
Audit Committee ◽  
Design Methodology ◽  
Earnings Quality ◽  
Earnings Announcements ◽  
Listed Companies ◽  
Market Reactions ◽  
Content Type ◽  
Earnings Response Coefficients ◽  
Earnings Response ◽  
Effect Hypothesis

Purpose The purpose of this paper is to investigate the audit effect hypothesis for the cross-quarter differential market reactions to earnings announcements. Design/methodology/approach Earnings response coefficients are focused upon as indicators of perceived earnings quality. Findings The evidence suggests that investors of Singapore listed companies respond more strongly to earnings announcements in the fourth quarter than other interim quarters. The findings support the notion that investors attach different degrees of reliability to interim quarter earnings relative to final quarter earnings. Originality/value Findings in this paper shed new light on the audit effect hypothesis and are relevant to accounting regulators and audit committee members seeking to enhance the credibility of earnings announcements.

scholarly journals EARNINGS RESPONSE COEFFICIENTS IN THE GREEK MARKET

2013 ◽  
Vol 14 (2) ◽  
pp. 414-431 ◽  
Author(s):  
Dimitrios I. Maditinos ◽  
Željko Šević ◽  
Jelena Stankevičienė ◽  
Nikolaos Karakoltsidis
Keyword(s):  
Stock Returns ◽  
Stock Return ◽  
Stock Exchange ◽  
Cross Sectional ◽  
Earnings Response Coefficients ◽  
Earnings Response ◽  
Athens Stock Exchange ◽  
One Year ◽  
The Relationship ◽  
Cumulative Model

The paper explores the relationship between accounting information and stock returns of the companies listed on the Athens Stock Exchange (ASE) in the period 1998–2008. Publicly available financial data on the companies included in the ASE during 1998–2008 have been collected and processed. The data sample consists of 245 companies and varies from 2,166 to 1,441 firm-year observations. The research methodology has been based on the extension of the model introduced by Kothari and Sloan (1992) and investigates whether the level of earnings divided by price at the beginning of the stock return period is associated with returns in the context of ‘prices lead earnings’ using annual and quarterly data. Cross-sectional regression analysis points to a significant relationship between earnings and returns on measurement windows of one year and longer. Similar results have been found in the case of a cumulative model where earnings are aggregated up to four years; however, relationship in the short measurement window up to three quarters has resulted in low earnings response coefficients.

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