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Author: Brian Michael Bratten
Publisher:
ISBN:
Category :
Languages : en
Pages : 198
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Book Description
This dissertation examines the general research issue of whether the components of earnings are informative and specifically 1) how analysts consider earnings components when predicting future earnings and 2) whether the information content in, and analysts' use of, earnings components have changed through time. Although earnings components have predictive value for future earnings based on each component's persistence, extant research provides only a limited understanding of whether and how analysts consider this when forecasting. Using an integrated income statement and balance sheet framework to estimate the persistence of earnings components, I first establish that disaggregation based on the earnings components framework in this study is helpful to predict future earnings and helps explains contemporaneous returns. I then find evidence suggesting that although analysts consider the persistence of various earnings components, they do not fully integrate this information into their forecasts. Interestingly, analysts appear to be selective in their incorporation of the information in earnings components, seeming to ignore information from components indicating lower persistence, which results in higher forecast errors. Conversely, when a firm's income is concentrated in high persistence items, analysts appear to incorporate the information into their forecasts, reducing their forecast errors. I also report that the usefulness of components relative to aggregate earnings has dramatically and continuously increased over the past several decades, and contemporaneous returns appear to be much better explained by earnings components than aggregate earnings (than historically). Finally, the relation between analyst forecast errors and the differential persistence of earnings components has also declined over time, indicating that analysts appear to recognize the increasing importance of earnings components through time.
Author: Brian Michael Bratten
Publisher:
ISBN:
Category :
Languages : en
Pages : 198
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Book Description
This dissertation examines the general research issue of whether the components of earnings are informative and specifically 1) how analysts consider earnings components when predicting future earnings and 2) whether the information content in, and analysts' use of, earnings components have changed through time. Although earnings components have predictive value for future earnings based on each component's persistence, extant research provides only a limited understanding of whether and how analysts consider this when forecasting. Using an integrated income statement and balance sheet framework to estimate the persistence of earnings components, I first establish that disaggregation based on the earnings components framework in this study is helpful to predict future earnings and helps explains contemporaneous returns. I then find evidence suggesting that although analysts consider the persistence of various earnings components, they do not fully integrate this information into their forecasts. Interestingly, analysts appear to be selective in their incorporation of the information in earnings components, seeming to ignore information from components indicating lower persistence, which results in higher forecast errors. Conversely, when a firm's income is concentrated in high persistence items, analysts appear to incorporate the information into their forecasts, reducing their forecast errors. I also report that the usefulness of components relative to aggregate earnings has dramatically and continuously increased over the past several decades, and contemporaneous returns appear to be much better explained by earnings components than aggregate earnings (than historically). Finally, the relation between analyst forecast errors and the differential persistence of earnings components has also declined over time, indicating that analysts appear to recognize the increasing importance of earnings components through time.
Author: Ramesh Narayana Chari
Publisher:
ISBN:
Category :
Languages : en
Pages : 140
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Book Description
This research investigates whether financial analysts fully incorporate the information contained in accrual and cash flow components of current earnings when forecasting future earnings. I present evidence that analysts fail to fully incorporate the implications of these components for earnings persistence in their forecasts. Analysts' appear to ignore information in past earnings to a greater extent when the magnitude of accruals in prior year earnings is large relative to cash flows. I find that information in these components can be used to improve analysts' forecasts. This improvement is most evident for firms which have a high incidence of accruals in prior year earnings. I demonstrate the economic significance of improving analysts' forecasts by implementing a trading strategy that predicts stock price changes. This trading strategy yields significantly positive risk-adjusted abnormal returns. These results suggest that analysts' forecasting inefficiency (see Mendenhall, 1991) is potentially rooted in their misperceptions about the implications of accruals and cash flows for earnings persistence. These findings are useful to accounting standard-setters and to capital markets research that uses analysts' forecasts to proxy for earnings expectations.
Author: Al Ehrbar
Publisher: John Wiley & Sons
ISBN: 9780471298601
Category : Business & Economics
Languages : en
Pages : 264
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Book Description
EVA ("economic value added" - wirtschaftliche Wertschöpfung) ist eine Maßeinheit zur Ermittlung des echten Finanzergebnisses eines Unternehmens und eine Strategie zur Schaffung von Unternehmens- und Aktionärsvermögen. Das EVA-Prinzip besagt, daß ein Unternehmen kein Vermögen schafft, solange es nicht in der Lage ist, Gewinne einzufahren, die höher sind als die Kapitalkosten. EVA ist auch eine Methode, die Prioritäten innerhalb eines Unternehmens so zu gewichten, daß das Hauptaugenmerk auf der Schaffung von Vermögen liegt, und zwar zum Nutzen aller. Leicht verständlich geschrieben, mit zahlreichen Fallbeispielen bekannter Firmen und einem Minimum an Gleichungen und Finanzjargon. (11/98)
Author: Nikolay Draganov
Publisher: GRIN Verlag
ISBN: 3346463400
Category : Business & Economics
Languages : en
Pages : 62
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Book Description
Master's Thesis from the year 2021 in the subject Business economics - Accounting and Taxes, grade: 1,0, University of Cologne, language: English, abstract: The primary aim of this study is to empirically examine the relative ability of accounting earnings and cash flow to predict future cash flow. Moreover, the role of accruals in cash flow predictions is called into question. One of the major purposes of financial reporting consists in ensuring an informational basis that helps investors, creditors and other users of accounting data to overcome the uncertainty associated with the future cash flows of enterprises their financial activity relates to. At the same time, the accrual concept prevails in modern accounting, since it is theorized to mitigate the mismatching and timing problems of the unrefined cash ba-sis accounting. Hence, recognizing revenues and expenses in the period when they have occurred, and not when cash was received or paid out, should create a more relevant framework for decision making. The use of accrual accounting earnings as a summary measure of financial performance instead of the more primitive cash flows is therefore advocated by accounting standard setters. For instance, the Financial Accounting Stand-ard Board claims that: “Information about enterprise earnings and its components measured by accrual accounting generally provides a better indica-tion of enterprise performance than information about current cash receipts and pay-ments”. The FASB’s statement led to a rising discussion in the financial research on whether accounting earnings provide a more reliable picture of a company’s future operating cash flows than current operating cash flows themselves do. Hence, a major implication of the above quotation refers to the incremental power of accruals and its components in predicting future cash flows beyond the one contained into current operating cash flows. This debate represents a cornerstone in evaluating the information quality offered by the accrual accounting concept.
Author: Kevin C. W. Chen
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
This study examines analyst forecast revisions after the disclosure of firms' deferred tax adjustments following the U.S. Omnibus Budget Reconciliation Act of 1993 (OBRA), which raised the corporate income tax rate from 34% to 35%. This deferred tax adjustment was a one-time item, and should have had no effect on analyst estimates of future earnings. However, we find that forecast revisions issued after the disclosure of income decreasing deferred tax adjustment were positively related to the amount of the adjustment. The complexity of the deferred tax adjustment and the newness of SFAS 109 (which required the adjustment) may have contributed to the failure of analysts to properly interpret this onetime item when revising their earnings forecasts.
Author: Ahmed Riahi-Belkaoui
Publisher: Bloomsbury Publishing USA
ISBN: 0313007861
Category : Business & Economics
Languages : en
Pages : 238
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Book Description
Financial analysis, based on ratio analysis, has been used as a tool for analyzing the financial strength of corporations. Although ratio analysis is generally used as a univariate strategy, the accounting and finance literature has evolved to include multivariate-based models in financial analysis, and these models can be used to explain important economic events and often predict them. Thus, in an exhaustive coverage of the economic events to which they can be applied, Riahi-Belkaoui discusses these models in a way that will have special value to corporate management, financial planners, and to their colleagues in the academic community who specialize in business and economic analysis.
Author: Dorothy Alexander-Smith
Publisher:
ISBN:
Category : Business forecasting
Languages : en
Pages : 143
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Book Description
Essay 1: The Association of Earnings Quality with Financial Analysts' Earnings Forecast Attributes. This study investigates the association between firms' earnings quality and analysts' forecast errors and dispersion. The findings suggest that the quality of earnings is inversely related to analysts' forecast errors but is not associated with forecast dispersion. These results are better understood by an examination of the relationship of forecast error and dispersion with the major sub-components of earnings quality- the quality of the innate accrual component (quality of accruals related to the complexity of the firm's operations) and the quality of the discretionary accrual component (quality of managements' judgment as reflected in accruals used to project future performance). The inverse association between earnings quality and forecast error is driven primarily by the quality of the firm's innate accrual component (InnAQ). As firm complexity and variability increase, earnings contain larger amounts of management judgment and estimation. The larger amount of management estimation included in earnings renders it relatively less reliable and thus forecasting difficulty (reflected in greater forecast errors and dispersion) is amplified for poorer InnAQ. This inverse association is the dominant effect in earnings quality's association with analysts' forecast errors. The quality of firms' discretionary accrual components depends upon whether managers use of their discretion to provide value relevant information, or whether they use the discretionary component to incorporate manipulative and noisy discretionary accruals. In a regression of the of firms' discretionary earnings components on forecast dispersion I find an inverse relationship between the magnitude of the firm's discretionary earnings component and analysts' forecast dispersion. This is consistent with managers using the discretionary component to provide information on firm performance, thus facilitating more precision in analysts' forecasts. This essay contributes to two controversial areas of accounting research. The study indirectly provides evidence supporting managers' (on average) use of their discretion to provide value relevant information in earnings; and it simultaneously demonstrates analysts' expertise in incorporating information related to EQ and its sub components into their forecasts. Essay 2: The Influence of Earnings Quality on Financial Analysts' Herding Behavior. Essay 2 investigates how firms' EQ and its innate (the quality of accruals related to the complexity of the firm's operations) and discretionary (the quality of accruals based on managements' discretion) sub-components affect analysts' motivation to issue herding forecasts. Herding forecasts are forecasts which mimic those issued by other analysts and ignore the analyst's own private information. Although theoretical studies have linked herding behavior to analysts' rational reputational concerns, herding reduces the information available to investors in the market and hence negatively impacts market efficiency. Conversely, bold forecasts, forecasts issued which move away from the consensus (linked in prior studies to greater private information release and higher accuracy) are likely to contribute to improved market efficiency. As capital market intermediaries, financial analysts are charged with facilitating investors' investment decisions. The literature documents that poor earnings quality reduces investors' ability to evaluate firm performance. This essay contributes to the literature by providing evidence on how financial analysts' herding behavior is influenced by EQ and its sub components. Results show that the quality of the firm's innate accrual component is the major driver of analysts' bold forecasting. The negative association between forecast boldness and firms' innate accrual quality indicates that analysts issue bolder forecasts when investors have more difficulty determining firm value (noisier signal from innate accrual component). Given the prior literature finds that bolder forecasts contain more private information and are more accurate, the results suggests that analysts are effectively performing their market intermediary function. The lack of a significant association between bold forecasting and the discretionary earnings component is in line with prior literature's documentation of analysts' poor utilization of the discretionary information in their forecasts. However, this study's evidence of a positive association between bold forecasts and analysts' firm specific experience implies that analysts with more firm specific experience have a greater understanding of managers' discretionary signals and exploit their advantage by issuing bolder forecasts. Results show a negative association between firms' overall EQ and analysts' forecast boldness implying that analysts herd more the higher the firm's EQ. This finding underscores the importance of reputational concerns and the demand for analysts' investment advice for analysts' herding behavior.
Author: Don Herrmann
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
Not all components of earnings are expected to provide similar information regarding future earnings. For example, basic financial statement analysis indicates that the persistence of ordinary income should be greater than the persistence of special, extraordinary, or discontinued operations. Because the market assigns higher multiples to earnings components that are more persistent, differentiating earnings components on the basis of relative persistence would appear to be useful. A focus on relative predictive value is consistent with research findings and user recommendations on separating earnings components that are persistent or permanent from those that are transitory or temporary. This paper examines the persistence and forecast accuracy of earnings components for retail and manufacturing companies listed in the world's two largest equity markets; the USA and Japan. We find the forecast accuracy of earnings in both the USA and Japan increases with greater disaggregation of earnings components. The results further indicate that the improvements in forecast accuracy due to earnings disaggregation are greater in the USA than in Japan. The greater emphasis and more detailed guidelines for reporting earnings components in the USA produce a better differentiation in the persistence of earnings components resulting in greater forecast improvements from earnings disaggregation.
Author: Anwer S. Ahmed
Publisher:
ISBN:
Category :
Languages : en
Pages : 38
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Book Description
This study investigates whether financial analysts correctly weight cash flows, accruals and components of accruals in forecasting future earnings. This examination is in the spirit of Sloan (1996) who documents evidence that investors do not correctly distinguish between the cash flow and accrual components of earnings. We find that analysts do distinguish between accruals and cash flows although they generally underweight the information in both accruals and cash flows. More importantly, we find that analysts do not distinguish between discretionary and non-discretionary accruals even though discretionary accruals are less persistent than non-discretionary accruals. Our findings complement and extend the findings in recent studies on analyst forecast inefficiency with respect to the information in accrual and cash flow components of earnings using alternative research designs [Teoh and Wong (1998), Bradshaw, Richardson and Sloan (2000), Barth and Hutton (2000)]. Analysts are considered to play an important role as information intermediaries in educating investors about the future prospects of firms. They are trained in analyzing financial data and have industry expertise as well as detailed firm-specific knowledge through contacts with managers. Thus, one would expect analysts to correctly incorporate the information in earnings components specifically discretionary versus non-discretionary accruals. Our evidence complements evidence in recent studies that raises questions about the ability of analysts, on-average, to correctly incorporate the information in accruals and cash flows in forecasting future earnings. This in turn implies that other outsiders are also likely to find it difficult to undo earnings management via discretionary accruals and therefore provides a rationale for the existence of earnings management.
Author: Wenjuan Xie
Publisher:
ISBN:
Category :
Languages : en
Pages : 138
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