Earnings forecasts of female CEOs: quality and consequences

This study examines the voluntary disclosure of earnings forecasts by female CEOs. We find that in the backdrop of increased pressure to perform from investors and other stakeholders, female CEOs tend to issue more earnings forecasts than male CEOs, and those forecasts are more accurate. We also find that while financial analysts generally prefer to follow companies headed by male CEOs, female CEOs’ efforts to issue accurate earnings forecasts pay off, as these efforts help them close the analyst coverage gap. We provide complementary evidence on the disclosure efforts of female CEOs with regard to updates to the forecast and the 10-K report. Lastly, we show that financial analysts rely more on the earnings forecasts of female CEOs, possibly because they recognize female CEOs’ superior forecasting quality. Our results are robust to the use of alternative research designs, including difference-in-difference, propensity score matching, and entropy balancing. Overall, our study documents gender differences in voluntary disclosure by senior management.

Margin Trading Program, External Profit Pressure and Enterprise Financialization—A Quasi-Natural Experiment Based on Double Difference Model

Based on the urgent need of the real economy to “get away from fictitious to substantial”, this paper constructs a quasi-natural experiment based on the margin trading program gradually implemented in China in 2010 and studies the influence of the margin trading program on the financialization level of the target company by using the difference-in-difference method. The results show that, because of the dominant role of financing transactions in margin trading programs in China’s capital market, financing transactions drive up the share prices of listed companies, which leads to an excessive easing of the financing constraints of listed companies and short-sighted behavior of executives, which has a significant role in promoting enterprise financialization. Moreover, the driving effect is more significant in state-owned enterprises, enterprises with a high degree of financing constraint, and enterprises with a low degree of marketization. Economic policy uncertainty will restrain the positive effect of margin trading programs on enterprise financialization through information and governance mechanisms. In contrast, the “branding” effect caused by the financial connection of senior executives will intensify the positive relationship between margin trading programs on enterprise financialization levels. When considering the intermediary effect, we find that the margin trading program will result in the optimistic deviation of analysts’ earnings forecasts and cause the external profit pressure of enterprises, thus increasing the financialization trend. This study is of great theoretical significance and practical value for evaluating the policy effect of the margin trading program, improving this policy, investigating the influencing factors of enterprise financialization, and promoting the real economy to move from fictitious to substantial.

Does the Equity Market Reward “Superior” Management Earnings Forecast? Evidence from the U.S. Quarterly Earnings Guidance

This paper examines whether equity markets reward the controversial practice of issuing short-term management earnings forecasts. Using a large sample of quarterly earnings forecasts, this research found that firms may temporarily reduce stock price volatility by issuing quarterly earnings forecasts. Furthermore, the analysis showed that not all guidance issuers are equally rewarded by equity capital markets. The benefits of reduced stock price volatility and favorable market valuation primarily accrue to firms with a track record of supplying accurate and timely short-term earnings forecasts. Findings suggest that superior short-term earnings guidance, which fosters transparent financial information environments and reduces investor information uncertainty, is indeed rewarded by equity capital markets. As limited research examines the association between forecast attributes and the capital market consequences of quarterly earnings guidance, this study aimed to provide empirical evidence on equity capital market rewards by issuing high-quality quarterly earnings guidance. A practical implication is that firms need to invest in accounting information systems and accounting talent in order to achieve capital market benefits of supplying high-quality short-term earnings forecasts. Keywords: quarterly earnings guidance, forecast attributes, accounting information system, equity market rewards, United States

Identifying the News in Analysts’ Earnings Forecasts Revisions: An Alternative to the Random Walk Expectation

Previous research indicates that analysts’ forecasts are superior to time series models as measures of investors’ earnings expectations. Nevertheless, research also documents predictable patterns in analysts’ forecasts and forecast errors. If investors are aware of these patterns, analysts’ forecast revisions measured using the random walk expectation are an incomplete representation of changes in investors’ earnings expectations. Investors can use knowledge of errors and biases in forecasts to improve upon the simple random walk expectation by incorporating conditioning information. Using data from 2005 to 2015, we compare associations between market-adjusted stock returns and alternative specifications of forecast revisions to determine which best represents changes in investors’ earnings expectations. We find forecast revisions measured using a ‘bandwagon expectations’ specification, which includes two prior analysts’ forecast signals and provides the most improvement over random-walk-based revision measures. Our findings demonstrate benefits to considering information beyond the previously issued analyst forecast when representing investors’ expectations of analysts’ forecasts.

Impact of Tournament Incentives on Management Earnings Forecasts

This paper examines how rank-order tournament incentives in the top management team (TMT) influence the quality of management earnings forecasts (MEFs). Instead of breeding feelings of inequality and fostering peer sabotage, the large pay gap between the CEO and subordinates may motivate top executives to issue more accurate and precise forecasts to win the prize of promotion. The positive tournament effect on the quality of MEFs is weakened (strengthened) when the perceived probability of promotion for candidates is low (high). We find that firms with higher tournament incentives are more likely to issue supplementary forecasts to increase the credibility of MEFs. By examining the tournament effect at each subordinate manager level, we find that CFOs are the driving force in controlling the frequency and quality of management forecasts and chief marketing officers (CMOs) may also contribute to the quality of management forecasts. The results are robust to multiple measures of tournament incentives and multiple research designs.

Brokerage trading volume and analysts’ earnings forecasts: a conflict of interest?

Using unique new data, we examine whether brokerage trading volume creates a conflict of interest for analysts. We find that earnings forecast optimism is associated with higher brokerage volume, even controlling for forecast and analyst quality, recommendations, and target prices. However, forecast accuracy is also significantly associated with higher volume. When analysts change brokerage houses, they bring trading volume with them, influencing trading volume at the new brokerage. This indicates that analysts drive the volume effects we observe. Consistent with a reward for generating volume, brokerage houses are less likely to demote analysts who generate more volume. Finally, analysts strategically adjust forecast optimism based on expected volume impact. Analysts become more (less) optimistic if their optimistic forecasts in the prior year were more (less) successful at generating volume. However, consistent with higher costs to increasing accuracy, analysts do not update accuracy based on expected volume impact. Overall, our results are consistent with a brokerage trading volume conflict of interest moving analysts towards more optimistic earnings forecasts, despite the volume reward for accuracy.

Spillover Effects of Analyst Coverage on IPO Firms

This study investigates the effect of analysts’ recommendations and earnings forecasts for newly listed firms in the same industry. IPO underpricing is significantly lower as the number of firms whose investment recommendations are upgraded increases, supporting the contagion effect hypothesis that a high affinity for the industry has a positive effect on the IPO offer price. However, as the number of listed firms with higher earnings forecasts increases, IPO underpricing is higher, which supports the competitive effect hypothesis that the profit growth of competitors negatively affects IPO firms’ competitiveness. The effects vary depending on the competitive positions of both listed firms and IPO firms within the industry. The results also show that in industries with high concentration (i.e. low competition) , analyst information on listed firms has a greater contagion effect, while the competition effect hypothesis that better earnings forecasts for rival firms negatively affect IPO firms’ competitive position is not supported. This study contributes to the literature by analyzing the information spillover effect of analyst coverage in the IPO market by showing that the effects vary depending on the firms’ competitive positions as well as industry competition.

Analysts’ cash flow forecasts informativeness, financial distress and auditor quality

Purpose The purpose of this study is to examine the sophistication (accuracy, bias, informativeness for changes in accruals) and market pricing of analysts’ cash flow forecasts for Eurozone listed firms and the effects of financial distress and auditor quality. Design/methodology/approach Accuracy/bias is investigated using analysts’ cash flow forecast errors. The naïve extrapolation model is used to examine the forecasts’ informativeness for working capital changes. A total return model is used to examine value-relevance. This study controls for the forecast horizon, using the Altman z-score and a BigN/industry specialization auditor indicator to proxy for distress and auditor quality, respectively. Findings Analysts efficiently adjust earnings forecasts for depreciation during cash flow forecast formation but fail to efficiently incorporate working capital changes. Findings indicate cash flow forecasts’ accuracy improves for distressed firms and firms of high auditor quality, attributed to analyst conservatism and accounting choices and more accurate earnings forecasts, respectively. Cash flow forecasts’ value-relevance increases for distressed firms, particularly those of high auditor quality and timely forecasts. Originality/value To the best of the authors’ knowledge, this study is the first to examine analysts’ cash flow forecasts taking into consideration financial distress and auditor quality, controlling for the analyst forecast horizon.