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.

scholarly journals The Role Of Earnings Quality In Financial Analyst Forecast Accuracy

2013 ◽  
Vol 30 (1) ◽  
pp. 255 ◽  
Author(s):  
David Salerno
Keyword(s):  
Earnings Quality ◽  
Financial Analysts ◽  
Forecast Accuracy ◽  
Earnings Forecasts ◽  
Cash Flows ◽  
Analyst Forecast ◽  
Financial Reports ◽  
The Individual ◽  
Reported Earnings ◽  
The Impact

This study investigates the impact that the quality of reported earnings has on the accuracy of financial analysts earnings forecasts. Extant research indicates that earnings attributes are important considerations to users of accounting information. One such attribute is earnings quality; often measured as the magnitude of accruals that do not convert to cash in a timely manner, where a poor match of cash flows and accruals indicates low earnings quality. Such accruals could reduce the usefulness of financial reports. This study uses two measurements of forecast accuracy to assess the impact that earnings quality has on the forecast accuracy of financial analysts. Following prior research, one measurement considers the environment in which the analyst operates and compares their accuracy to that of their peers. The second compares the individual analyst forecast to the actual reported earnings. For both measurements of accuracy the results show that higher earnings quality is associated with improved forecast accuracy.

Gender-Diverse Boards and Properties of Analyst Earnings Forecasts

2013 ◽  
Vol 27 (3) ◽  
pp. 511-538 ◽  
Author(s):  
Ferdinand A. Gul ◽  
Marion Hutchinson ◽  
Karen M. Y. Lai
Keyword(s):  
Stock Price ◽  
Audit Quality ◽  
Gender Diversity ◽  
Forecast Accuracy ◽  
Earnings Forecasts ◽  
Corporate Boards ◽  
Price Informativeness ◽  
Board Diversity ◽  
Financial Reports ◽  
Quality Stock

SYNOPSIS Using a sample of 2,200 U.S. listed firm-year observations (2001–2007), this study shows a positive (negative) relation between gender diversity on corporate boards and analysts' earnings forecast accuracy (dispersion), after controlling for earnings quality, corporate governance, audit quality, stock price informativeness, and potential endogeneity. Our findings are important as they suggest that board diversity adds to the transparency and accuracy of financial reports such that earnings expectations are likely to be more accurate for these firms.

scholarly journals Fair value intensity and analyst forecasts

2018 ◽  
Vol 11 (1) ◽  
Author(s):  
Wessel M. Badenhorst
Keyword(s):  
Forecast Accuracy ◽  
Earnings Forecasts ◽  
Fair Value ◽  
Analyst Forecasts ◽  
The United States ◽  
Book Value ◽  
The United Kingdom ◽  
Value Measurement ◽  
The Impact ◽  
Book Values

Analysts’ earnings and book value forecasts play an important role in price discovery in equity markets. As the role of fair value measurements in accounting increases, the impact on analysts’ ability to accurately forecast earnings and book values is unclear. This article develops a method to calculate the degree of fair value measurement in financial statements and investigates the impact thereof on the accuracy of analysts’ book value and earnings forecasts, using a sample of firms listed in the United States and the United Kingdom from 2010 to 2014. Relying on multivariate regression findings, the article shows that greater fair value intensity decreases the 12-month analyst forecast accuracy for earnings in both countries. Moreover, there is some evidence that higher fair value intensity decreases the accuracy of analysts’ book value forecasts. It therefore appears that increased fair value intensity under a mixed measurement approach limits the ability of analysts to forecast earnings, without a compensating impact on forecasts of book values.

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.

scholarly journals The Impacts Of CEO Turnover & Degree Of Internationalization On The Accuracy Of Analyst Forecasts

2011 ◽  
Vol 7 (7) ◽  
Author(s):  
Marc R. Bernard
Keyword(s):  
Forecast Accuracy ◽  
Analyst Forecasts ◽  
Ceo Turnover ◽  
Analyst Forecast ◽  
Firm Characteristics ◽  
The Impact ◽  
Different Levels ◽  
Negative Link ◽  
Degree Of Internationalization

This study analyzes the impact of CEO turnover on the accuracy of analyst forecasts. Specifically, it examines the level of information that becomes available to analysts covering firms with different levels of internationalization, a proxy for firm complexity, during periods surrounding these events. After controlling for analyst and firm characteristics, along with regulatory period variables, this study finds that the accuracy of analyst forecasts improves in periods immediately following the turnover event. Results further indicate that the accuracy in the post-turnover period is greater for firms with lower levels of internationalization. In general, these findings are consistent with prior research describing the improvement of forecasts surrounding the CEO turnover event, the positive link between forecast accuracy and company disclosures, and finally, the negative link between analyst forecast accuracy and the complexity of the forecasting task.

Market Reactions to a High-Quality Auditor and Managerial Preference for Audit Quality

2019 ◽  
Vol 38 (4) ◽  
pp. 131-149 ◽  
Author(s):  
Patrick J. Hurley ◽  
Brian W. Mayhew
Keyword(s):  
Loss Aversion ◽  
Audit Quality ◽  
Data Availability ◽  
Quality Competition ◽  
High Quality ◽  
Market Reactions ◽  
Comprehensive Theory ◽  
Audit Reports ◽  
The Impact ◽  
Quality Theory

SUMMARY We insert an automated high-quality (HQ) auditor into established experimental audit markets to test the impact of high-quality competition on other auditors' supply of and managers' demand for audit quality. Theory predicts that managers will demand high levels of audit quality to avoid investors' price-protecting behavior. This demand should result in the HQ auditor dominating the market and increase other auditors' audit quality provision to compete with the HQ auditor. However, we find that the HQ auditor does not dominate the market—despite holding audit costs constant and investors placing a premium on HQ auditor reports. We also find that adding an HQ auditor results in other auditors lowering audit quality. Additional analyses indicate some managers demand lower audit quality to avoid negative audit reports, consistent with loss aversion as a potential explanation. Our findings indicate a need to develop a more comprehensive theory of the demand for auditing. Data Availability: The laboratory market data used in this study are available from the authors upon request.

Strategic Audit Inquiry: The Impact of Timing and the Promotion of Statutory Protections on Client Fraud Disclosures

2020 ◽  
Vol 34 (3) ◽  
pp. 153-167
Author(s):  
John R. Lauck ◽  
Stephen J. Perreault ◽  
Joseph R. Rakestraw ◽  
James S. Wainberg
Keyword(s):  
Best Practices ◽  
Audit Quality ◽  
Self Regulation ◽  
Data Availability ◽  
Audit Committees ◽  
External Auditors ◽  
Extant Literature ◽  
Psychological Theories ◽  
Inquiry Process ◽  
The Impact

SYNOPSIS Auditing standards require external auditors to inquire of client-employees regarding their knowledge of actual or suspected fraud (PCAOB 2010b; AICPA 2016). However, the extant literature provides little guidance on practical methods that auditors can employ to increase the likelihood of fraud disclosure and improve audit quality. Drawing upon best practices in the whistleblowing literature and psychological theories on self-regulation, we experimentally test the efficacy of two practical strategies that auditors can employ during the fraud inquiry process: actively promoting statutory whistleblower protections and strategically timing their fraud inquiries. Our results indicate that auditors are more likely to elicit client-employee fraud disclosures by actively promoting statutory whistleblower protections and strategically timing the fraud inquiry to take place in the afternoon, when client-employee self-regulation is more likely to be depleted. These two audit inquiry strategies should be of considerable interest to audit practitioners, audit committees, and those concerned with improving audit quality. Data Availability: From the authors by request.

Asymmetric Effects of Regulation FD on Management Earnings Forecasts

2015 ◽  
Vol 91 (1) ◽  
pp. 119-152 ◽  
Author(s):  
Frank Heflin ◽  
William J. Kross ◽  
Inho Suk
Keyword(s):  
Public Management ◽  
Earnings Forecasts ◽  
Analyst Forecasts ◽  
Data Availability ◽  
Management Earnings Forecasts ◽  
Fair Disclosure ◽  
Environment Variables ◽  
Regulation Fd ◽  
Investor Trading ◽  
Induced Changes

ABSTRACT We document that the effect of Regulation Fair Disclosure (FD) on public management earnings forecasts (MFs) is asymmetric. Our results suggest that FD increased managers' use of MFs as a downward-guidance mechanism to help achieve meeting or beating earnings expectations. This effect is more pronounced when existing analyst forecasts are optimistic and when firms had selective disclosure policies pre-FD. We also find that the increased use of MFs as downward guidance leads to post-FD reductions in MF quality (accuracy and informativeness) for the downward guiding MFs that are most likely meet/beat motivated, while quality improves for upward-guiding MFs. Finally, our evidence suggests that results from prior research about FD-induced changes in information environment variables, such as analyst forecast quality and investor trading activities, depend on whether the firm issues MFs and whether those MFs are downward guiding. Data Availability: All data are available from public databases identified in the paper.

Stock Splits: Tests of the Earnings Signaling and Attention Directing Hypotheses Using Analyst Forecasts and Revisions

1994 ◽  
Vol 9 (3) ◽  
pp. 411-422 ◽  
Author(s):  
David T. Doran
Keyword(s):  
Earnings Forecasts ◽  
Analyst Forecasts ◽  
Analyst Forecast ◽  
Specific Level ◽  
Future Earnings ◽  
Earnings Information ◽  
Stock Split ◽  
Forecast Revision ◽  
Earnings Performance ◽  
Signaling Hypothesis

The major findings of this study are: (1) earnings performance of splitting firms is favorable relative to preevent longterm analyst (Value Line) forecasts; (2) analysts significantly revise earnings forecasts upward in response to stock split announcements; and (3) in the case of stock split announcing firms, there is a high correlation between future earnings performance and analyst forecast revision. These findings indicate that stock split announcements convey “permanent” earnings information to the market, and security analysts scrutinize the earnings signal at the firm specific level. The results support both the earnings signaling hypothesis and the attention directing hypothesis concerning stock split events.

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]).

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