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Author: Robert Libby
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
We investigate analysts? reactions to qualitative warnings of adverse earnings, and attempt to reconcile analysts? more negative forecast revisions, as documented in previous research, and the apparently conflicting anecdotal evidence that suggests more positive responses to firms that warn. We conjecture that the inconsistency arises because warnings cause analysts to revise their earnings forecasts sequentially in response to two related signals (the warning and the earnings announcement). However, their responses to retrospective questions about the effects of warnings are the result of a simultaneous response to both signals. In our experiment, 28 financial analysts predicted future years? earnings in one of three conditions. Consistent with the anecdotal evidence suggesting that analysts evaluate warnings positively, analysts who simultaneously evaluated a warning and a later earnings announcement (the Simultaneous warning condition) forecasted higher future earnings than analysts who received no warning (the No Warning condition). However, analysts who first revised their forecasts based on the warning and then made a second revision based on the later earnings announcement (our Sequential warning condition) forecasted much lower future earnings than those in the Simultaneous warning condition, and slightly lower future earnings than in the No warning condition. This suggests that the act of sequential processing contributes to analysts more negative forecasts documented in previous archival research. Taken together, these results suggest that the positive impact of analysts' stated beliefs about firms that warn (as reflected in their responses to reporters? retrospective questions) are more than offset by the effects of sequentially processing a warning followed by an earnings announcement.
Author: Robert Libby
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
We investigate analysts? reactions to qualitative warnings of adverse earnings, and attempt to reconcile analysts? more negative forecast revisions, as documented in previous research, and the apparently conflicting anecdotal evidence that suggests more positive responses to firms that warn. We conjecture that the inconsistency arises because warnings cause analysts to revise their earnings forecasts sequentially in response to two related signals (the warning and the earnings announcement). However, their responses to retrospective questions about the effects of warnings are the result of a simultaneous response to both signals. In our experiment, 28 financial analysts predicted future years? earnings in one of three conditions. Consistent with the anecdotal evidence suggesting that analysts evaluate warnings positively, analysts who simultaneously evaluated a warning and a later earnings announcement (the Simultaneous warning condition) forecasted higher future earnings than analysts who received no warning (the No Warning condition). However, analysts who first revised their forecasts based on the warning and then made a second revision based on the later earnings announcement (our Sequential warning condition) forecasted much lower future earnings than those in the Simultaneous warning condition, and slightly lower future earnings than in the No warning condition. This suggests that the act of sequential processing contributes to analysts more negative forecasts documented in previous archival research. Taken together, these results suggest that the positive impact of analysts' stated beliefs about firms that warn (as reflected in their responses to reporters? retrospective questions) are more than offset by the effects of sequentially processing a warning followed by an earnings announcement.
Author: Weihong Xu
Publisher:
ISBN:
Category :
Languages : en
Pages : 132
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Book Description
Author: Arianna S. Pinello
Publisher:
ISBN:
Category :
Languages : en
Pages : 40
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Book Description
Archival studies document an asymmetrically strong market reaction to positive vis-agrave;-vis negative earnings surprises. This finding appears inconsistent with the well-known effect of loss aversion and remains unexplained. I contend that this reaction pattern can arise when investors' earnings expectations do not coincide with analyst forecasts. Numerous studies document optimistic biases in analyst forecasts. If investors perceive optimistic biases in analyst forecasts, their earnings expectations will be lower than analyst forecasts. Because the contrast between the obtained and the expected outcome determines the degree of perceived surprise, an investor expectation which is below the analyst forecast results in a larger (smaller) perceived earnings surprise than reported when the surprise is positive (negative). Investors' lower expectations relative to analyst forecasts therefore result in a stronger reaction to positive than to negative reported earnings surprises of equivalent magnitude. In a controlled experiment, I replicate the asymmetrically strong reaction to positive reported earnings surprises, and trace this reaction pattern to investors' perceptions of these surprises. I further show that when earnings surprises are measured based on investors' perception of those surprises, the differential reaction pattern reverses: investors react asymmetrically strong to negative vis-agrave;-vis positive perceived earnings surprises, consistent with loss aversion. My findings carry implications for investors and accounting researchers.
Author: Charles W. Mulford
Publisher: John Wiley & Sons
ISBN:
Category : Business & Economics
Languages : en
Pages : 654
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Book Description
A material difference between a corporation's expected and actual earnings, otherwise known as an earnings surprise, can spell big trouble for lenders and equity investors, to say nothing of the company in question. The failure to anticipate a negative result can threaten a lender's prospects for loan repayment, cause investors to absorb heavy losses, and trigger substantial losses on positions in equity securities.
Author: Joshua Livnat
Publisher:
ISBN:
Category :
Languages : en
Pages : 37
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Book Description
Consistent with prior studies, this study shows that extremely negative and extremely positive earnings surprises in the fourth quarter have lower levels of persistence than those in the first through third fiscal quarters. Furthermore, extremely negative earnings surprises in the fourth fiscal quarter have lower levels of persistence than extremely positive earnings surprises in that quarter.Similar to the patterns of persistence, the post-earnings-announcement drift in prices is declining through the four quarters of the fiscal year, with the smallest drift occurring after the announcement of the fourth fiscal quarter. The drift after the fourth quarter is virtually nonexistent for extremely negative earnings surprises and smaller than extremely positive surprises, in line with the differential persistence of these surprises. The combined evidence in the study is consistent with investors who under-react to extreme earnings surprises because they seek further information. When the new information confirms the initial surprise, prices move in the same direction, creating a drift. The results of the study are robust to earnings surprises based on time-series properties of earnings or analyst forecasts.
Author: Jonathan B. Hornaday
Publisher:
ISBN:
Category :
Languages : en
Pages : 64
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Author: Sundaresh Ramnath
Publisher: Now Publishers Inc
ISBN: 1601981627
Category : Business & Economics
Languages : en
Pages : 125
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Book Description
Financial Analysts' Forecasts and Stock Recommendations reviews research related to the role of financial analysts in the allocation of resources in capital markets. The authors provide an organized look at the literature, with particular attention to important questions that remain open for further research. They focus research related to analysts' decision processes and the usefulness of their forecasts and stock recommendations. Some of the major surveys were published in the early 1990's and since then no less than 250 papers related to financial analysts have appeared in the nine major research journals that we used to launch our review of the literature. The research has evolved from descriptions of the statistical properties of analysts' forecasts to investigations of the incentives and decision processes that give rise to those properties. However, in spite of this broader focus, much of analysts' decision processes and the market's mechanism of drawing a useful consensus from the combination of individual analysts' decisions remain hidden in a black box. What do we know about the relevant valuation metrics and the mechanism by which analysts and investors translate forecasts into present equity values? What do we know about the heuristics relied upon by analysts and the market and the appropriateness of their use? Financial Analysts' Forecasts and Stock Recommendations examines these and other questions and concludes by highlighting area for future research.
Author: Katrina Ellis
Publisher:
ISBN:
Category :
Languages : en
Pages : 25
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Book Description
It has been well-documented that prices respond quickly, if not completely, to the information in quarterly earnings announcements. In this paper we show that after conditioning on past earnings surprises, companies that meet analyst expectations have positive (negative) returns following a prior negative (positive) surprise. We attribute this price response to investors expecting to be surprised, in that they expect past earnings surprises to continue into the future. As meeting expectations is a reversal of the surprise trend, the investors react to this new information by reversing the price trend. The price response to meeting earnings forecasts appears to be due to investor overreaction, with subsequent returns undoing the overreaction.
Author: Lawrence D. Brown
Publisher:
ISBN:
Category :
Languages : en
Pages : 40
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Book Description
Nonnegative (negative) cash flow surprises help generate nonnegative (negative) earnings surprises; hence, the two surprises are generally expected to have the same sign. We document firms' propensity to report surprises of opposing signs and investigate conditions under which firms beat cash flow forecasts but miss earnings forecasts. Firms are more likely to do so when: adverse valuation consequences are less severe; analyst following of cash flows vis-agrave;-vis earnings is large; analysts forecast extreme accruals; analysts downwardly revise cash flow but not earnings forecasts; firms are in financial distress; firms have inflated balance sheets; and earnings but not cash flows decrease.
Author: Robert Bloomfield
Publisher: Now Publishers Inc
ISBN: 1601982143
Category : Business & Economics
Languages : en
Pages : 100
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Book Description
Experimental Research in Financial Reporting examines the use of virtual worlds as next-generation laboratories that can help experimental researchers implement features of complex institutions that are not feasible in traditional laboratory settings. This new technology, originally developed for online computer games, lends itself very well to complex economic settings with large numbers of agents interacting through complex institutions for long periods of time. These virtual worlds provide the opportunity to construct settings whose complexity approaches those that accounting researchers wish to study. Since the settings are virtual, researchers can use experimental methods to control and manipulate institutional features (like accounting regulations) and environmental features (such as industry forces) to allow clear causal inferences with limited reliance on econometrics.
