Author: Dawn A. Matsumoto
Publisher:
ISBN:
Category :
Languages : en
Pages : 54
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Book Description
Recent reports in the popular press allege that managers guide analysts' forecasts downward to improve their chances of meeting or beating these forecasts when earnings are announced. Since the majority of this alleged guidance is unobservable, I use systematic patterns in analysts' forecast errors as a proxy for firm-provided guidance and examine both the change in guidance over time as well as the characteristics of firms exhibiting evidence of this guidance. The evidence is consistent with an increase in firm-provided guidance in recent years and differences across firms in the propensity to guide forecasts downward. In particular, I find: 1) an increasing number of forecast errors exactly equal to zero particularly for firms with initially high forecasts; 2) when firms miss analysts' expectations at the earnings announcement, the proportion that miss quot;highquot; (positive earnings surprise) versus miss quot;lowquot; (negative earnings surprise) has increased in recent years particularly for firms with initially high forecasts; 3) firms with higher growth prospects, higher institutional ownership, and higher litigation risk are more likely to guide analysts' forecasts downward to ensure reported earnings meet expectations at the earnings announcement, while firms with low value relevance of earnings are less likely to do so; and 4) firms with high institutional ownership and reliance on implicit claims with their stakeholders tend to exceed rather than fall short of expectations at the earnings announcement.
Author: Dawn A. Matsumoto
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
Recent reports in the business press allege that managers take actions to avoid negative earnings surprises. I hypothesize that certain firm characteristics are associated with greater incentives to avoid negative surprises. I find that firms with higher transient institutional ownership, greater reliance on implicit claims with their stakeholders, and higher value relevance of earnings are more likely to meet or exceed expectations at the earnings announcement.I also examine whether firms manage earnings upward or guide analysts' forecasts downward to avoid missing expectations at the earnings announcement. I examine the relation between firm characteristics and the probability (conditional on meeting analysts' expectations) of having (1) positive abnormal accruals, and (2) forecasts that are lower than expected (using a model of prior earnings changes). Overall, the results suggest that both mechanisms play a role in avoiding negative earnings surprises.
Author: Susana Callao
Publisher:
ISBN:
Category :
Languages : en
Pages : 27
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Book Description
The aim of our study is to determine, within the area of Listed Spanish companies, whether analyst forecasts constitute an incentive to manage earnings (upwards to achieve them or downwards to avoid exceeding them) and whether this incentive acquires the same or different importance for the management of companies at different times. Using the approach of discretionary accruals to measure manipulation, the results show that earnings forecasted by analysts constitute an incentive to manage earnings and that this incentive is greater as the publication of earnings approaches. However, we do not find evidence of an incentive to manage earnings downwards in order not to exceed analyst forecasts, thereby avoiding subsequent forecasts that might be difficult to achieve.
Author: Vahid Biglari
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Author: Phillip J. McKnight
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
This paper addresses the issue of the relationship between financial analysts' forecasts and key governance mechanisms. We test the extent that the presence and structure of a firm's audit, remuneration and nomination committee affects both analysts' forecast errors and the dispersion of the errors. We argue that independent sub-committees are likely to reduce the management's incentive to adopt earnings management strategies that distort financial analysts' forecasts. After accounting for various control factors our initial results show that the presence of an audit, remuneration, and nomination committee reduces analysts forecast errors. We also find that independent audit, remuneration, and nomination committees lead to lower analyst forecast errors. The results suggest that the presence of the non-executive directors on the firm's sub-committees reduce dispersion in analysts' forecasts and therefore a firm's value trades nearer its fundamental value.
Author: Mei Feng
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
We document that, when revising their short-term earnings forecasts in response to management guidance, analysts wishing to curry favor with management weight the guidance more heavily than predicted based on the credibility and usefulness of the guidance. This overweighting of guidance is present prior to equity offerings and other events that could lead to investment banking business. Although analysts sacrifice their forecast accuracy by overweighting management guidance, they appear to benefit, on average, by subsequently gaining the underwriting business for their banks. Thus, while analysts wishing to please managers are optimistic in their long-term earnings forecasts, they take their cue from management when determining their short-term earnings forecasts.
Author: Tsahi Versano
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
This paper analyzes a manager's optimal expectations management strategy in a setting in which the manager provides forecast guidance to an analyst both privately and publicly. Conventional wisdom suggests that managers use private communications with analysts and public earnings forecasts interchangeably to guide analysts' earnings forecasts downward toward lower earnings targets. Our analysis shows that in markets with rational investors, private and public guidance play very different roles in managing expectations and that managers benefit from downward guidance only in their private communication with analysts. In their public forecasts they benefit from introducing an upward bias. We explore how the effectiveness of the private and public channels in communicating information to analysts affects managers' incentive to engage in expectations management and provide a number of empirical predictions. Among other results, we show how reducing private communication between managers and analysts (through means such as Regulation Fair Disclosure) can increase price efficiency, weaken managers' motivation to engage in private, as well as public, expectations management, and increase managers' motivation to provide public disclosures.
Author: Mohamed Khairat Abdel-Gelil Gaber
Publisher:
ISBN:
Category :
Languages : en
Pages : 140
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Book Description
Author: Senyo Y. Tse
Publisher:
ISBN:
Category :
Languages : en
Pages : 40
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Book Description
The likelihood that earnings announcements meet or beat analyst expectations differs substantially and systematically across firms. Prior research explores managers incentives to meet analyst expectations. In this paper, we examine analysts incentives to issue systematically biased earnings forecasts and thereby influence the likelihood that firms report good earnings news. We first document that forecast biases are systematically different, as large firms and firms with low forecast dispersion - labeled high-information firms - are more likely to report positive earning surprises, while small firms and firms with large forecast dispersion - labeled low-information firms - tend to have optimistically biased forecasts that often lead to negative earnings surprises. We also show that potential financing needs induce more optimistic forecasts for low-information firms, but this effect is greatly mitigated for high-information firms. We find that career concerns help explain analysts' systematic forecast bias. An analyst's career longevity is enhanced by issuing pessimistic forecasts for high-information firms and optimistic forecasts for low-information firms. Optimistic forecast bias for high-financing-need firms has no consequence for an analyst's career longevity, but optimistic bias for low-financing-need firms hurts. Our results suggest that career concerns contribute to a systematic pattern of forecasting that aligns with managerial preferences.
Author: Yuyan Guan
Publisher:
ISBN: 9780494219447
Category :
Languages : en
Pages : 230
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Book Description
This thesis examines the determinants of analysts' reactions to firms' earnings management. I present a model showing that analysts revise their forecasts according to their forecast errors revealed by earnings announcements and reporting biases embedded in reported earnings. The model further demonstrates that the relationship between forecast revisions and reporting biases can be affected by analysts' forecasting ability, the inherent uncertainty of whether reporting biases have occurred, as well as analysts' incentives. To empirically test the model's prediction regarding analysts' forecasting ability, I use analysts' firm-specific experience, size of their brokerage firm, and the number of industries they follow as proxies. Consistent with the model's prediction, I provide evidence showing that well-experienced analysts adjust more for earnings management while analysts following a greater number of industries adjust less for earnings management. Sensitivity analysis using analyst's historical firm-specific forecast accuracy as an alternative measure of forecasting ability further supports the hypothesis that analysts with better forecasting ability adjust more for earnings management. Moreover, analysts adjust less for earnings management when the inherent uncertainty of the reporting bias is greater. Specifically, analysts adjust less for earnings management when: (1) the past volatility of discretionary accruals is high; and (2) the firm has a marked propensity to smooth earnings. There is little evidence that affiliated analysts adjust less for earnings management than unaffiliated analysts. However, analysts adjust more for earnings management in the post-Reg FD period than in the pre-Reg FD period, which is consistent with Regulation FD achieving its objective of strengthening analysts' incentives to issue unbiased forecasts.
