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Copyright of Contemporary Accounting Research is the property of Canadian Academic Accounting Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

We find that firms with preliminary earnings that are expected to just meet analyst forecasts are more likely to only disclose (i.e., not accrue) litigation loss contingencies, claiming that the litigation event falls below the qualitative thresholds necessitating accrual. We also find that this opportunistic treatment of a subjective estimate is reduced when firms' auditors have expertise in the defendant's industry or have experience auditing litigation contingencies. Furthermore, we find that opportunistic disclosure usage increases when firms are more economically important to auditors' client portfolios. Our results are robust to a series of additional tests. We provide evidence to support the Public Company Accounting Oversight Board's (PCAOB) call for increased auditor professional skepticism toward management bias and opportunism when evaluating subjective estimates. [ABSTRACT FROM AUTHOR]

Prior studies find a positive relation between analyst forecast revisions and upcoming news, suggesting that analysts' forecast revisions are incomplete with respect to available information. In this study, we use the association between forecast revisions and upcoming news to measure forecast completeness and show that post-forecast-revision drift is higher when forecasts are incomplete. We follow Hui and Yeung's (2013) approach to separate forecast revision news into industry-wide and firm-specific components because they find that drift is primarily associated with the industry component. We find that forecast revisions are less complete for industry-wide news than for firm-specific news. Furthermore, analysts' industry-wide revisions are less complete early in the year and when the underlying news is bad, and we find stronger post-forecast-revision drift in those cases. We also show that analysts who were optimistic in prior periods tend to issue forecasts that are less complete and that generate stronger drift than forecasts by other analysts. Our findings provide an explanation for the drift that contrasts with prior studies that attribute the drift to investors' slow assimilation of the news in forecast revisions. Thus, our study sheds light on analysts' role in conveying firm-specific and industry-wide news to investors and on the implications for post-forecast-revision drift. [ABSTRACT FROM AUTHOR]

Copyright of Contemporary Accounting Research is the property of Canadian Academic Accounting Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

We empirically study the relationship between currency excess returns and current account uncertainty, measured as forecast dispersion. We find that investment currencies deliver low returns, whereas funding currencies offer a hedge when current account uncertainty is unexpectedly high. Moreover, an increase in current account uncertainty is associated with higher expected future excess returns on investment currencies. This mechanism is consistent with the recent advances in exchange rate theory based on capital flows in imperfect financial markets. This paper was accepted by Gustavo Manso, finance. Funding: A. Krecetovs thanks the Brevan Howard Centre at Imperial College London for financial support. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2023.4949. [ABSTRACT FROM AUTHOR]

Purpose: In this study, the authors investigate if analysts, as knowledgeable information intermediaries, can correctly identify bank corporate social responsibility (CSR) activities and can reliably transmit that information to investors. Hence, the authors specifically explore if analysts perceive and behave differentially in the presence of genuine bank CSR activities (strengths). The authors also analyze if financial markets differentially assess bank CSR strengths. The authors further explore the viability of focusing on analyst and financial markets to validate genuine bank CSR strengths. Design/methodology/approach: The authors use COMPUSTAT and CRSP for firm and financial data, I/B/E/S for analyst reporting data and MCSI Research KLD for CSR data. The sample consists of 329 distinct banks and 2,525 bank-year observations from 2003 to 2016. The primary CSR score is the total number of CSR strengths less the total number of CSR concerns, across six of the seven dimensions for each firm in each year of the sample (Adjusted CSR Score). In addition, the authors estimate all the analyses with dis-aggregated measures of total CSR strengths and total CSR concerns (Adjusted Total Strength Score). Findings: The authors find that analysts correctly distinguish and construe bank CSR strengths from CSR concerns. Specifically, bank CSR strengths increase analyst following and forecast accuracy, while decreasing analyst forecast dispersion. The authors further find that bank CSR strengths increase bank market returns. These results are reversed for bank CSR concerns. Additionally, the authors demonstrate that this method using knowledgeable intermediaries can help validate bank CSR strengths. Research limitations/implications: The sample is limited to US banks and financial markets. The regulatory and information environment is likely to be different from global or emerging markets. However, since banks in many countries aspire to emulate the US banks, these results would be a precursor of banking sectors conditions in emerging markets. Additionally, the availability of data limits the sample to a period that ends in 2016. To the extent that the importance of ESG and CSR concerns has increased in the intervening time, the results may not accurately reflect the current state of the market. Practical implications: This investigation benefits researchers, customers, banking executives, regulators and activist groups. First, the authors show that in addition to customers, analysts and the financial markets appreciate bank CSR strengths. Second, despite sophisticated financial reporting by banks, analysts correctly distinguish and construe bank CSR strengths. Third, the authors demonstrate a method for bank marketing researchers to validate genuine bank CSR activity, as well as provide additional support for customer related bank CSR outcomes. Fourth, the findings highlight the importance for banks to have high-quality CSR reporting. This might be especially helpful to a bank rebuilding its reputation after a CSR failure. Finally, this investigation using US banks could serve as a precursor for future bank CSR research and help develop CSR reporting guidelines for banks in emerging economies. Social implications: This investigation benefits researchers, customers, banking executives, regulators and activist groups. Originality/value: This investigation benefits researchers, customers, banking executives, regulators and activist groups. First, the authors show that in addition to customers, analysts and the financial market appreciates bank CSR strengths. Second, despite sophisticated financial reporting by banks, analysts correctly distinguish and construe bank CSR strengths. Third, the authors demonstrate a method for bank marketing researchers to validate genuine bank CSR activity, as well as provide additional support for customer related bank CSR outcomes. Fourth, the findings highlight the importance for banks to have high-quality CSR reporting. This might be especially helpful to a bank rebuilding its reputation after a CSR failure. Finally, this investigation using US banks could serve as a precursor for future bank CSR research and help develop CSR reporting guidelines for banks in emerging economies. [ABSTRACT FROM AUTHOR]

This paper examines whether analysts and investors efficiently incorporate the informational signals from managerial linguistic complexity (e.g., Fog) into their forecasts and trading decisions. We predict that a manager's Fog during a conference call provides a signal of their private information through their willingness to engage with analyst questions. We find that informative (obfuscatory) managerial Fog provides a positive (negative) signal of future earnings growth. We also find that analysts efficiently revise their forecasts to both positive and negative signals, whereas investors only correctly interpret obfuscation during the call; there is a delayed price reaction to informative Fog. However, when buy-side investors ask questions during a call, we find an efficient price reaction to informative Fog. Our findings highlight an important benefit of two-way interactive disclosures and underline the importance of active call participation for efficiently incorporating linguistic signals of managers' private information. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: D82; G14; G20; M41. [ABSTRACT FROM AUTHOR]

The paper examines how central bank communication affects the macro information in analyst forecasts. Using quarterly data of Chinese‐listed firms from 2007 to 2018, we find that richer and more frequent central bank communication increases the macro information contained in analyst forecasts. This effect is realized through the employment of in‐house economists by security firms. In addition, we document that the effect of central bank communication on macroeconomic information in analyst forecasts is more salient under a contractionary monetary policy regime, during a bear market, or when the economic policy is more uncertain. We also show that analyst forecasts are more sensitive to central bank communication when firms that they follow are state‐owned enterprises, have larger leverage ratios, or are located in more developed regions. In addition, analyst forecasts are more susceptible to central bank communication when the communication is in an informal oral format, when the public has more trust in the credibility of the central bank communication, and when the central bank pays more attention to expectation management after 2010. Finally, we show that richer and more frequent central bank communication also improves the accuracy of analyst forecasts. [ABSTRACT FROM AUTHOR]

(Soliman, The Accounting Review 83:823–853, 2008) finds that separating return on net operating assets (RNOA) into DuPont components—profit margin and asset turnover—improves prediction of future RNOA. (Dickinson, The Accounting Review 86:1969–1994, 2011) finds that a firm's life-cycle stage explains changes in future RNOA. (Vorst and Yohn, The Accounting Review 93:357–381, 2018) find that life-cycle calibration improves prediction more than industry grouping in prediction models that do not include the DuPont components. We unite and extend the above studies by using data updated since the early 2000s and performing out-of-sample tests. We show that the DuPont components continue to improve prediction of one-year-ahead RNOA. Industry grouping and life-cycle calibration using the components improve prediction further. The improvement by life-cycle calibration is stronger for mature companies, more R&D-intensive companies, less capital-intensive companies, and companies in less concentrated industries. Sell-side equity analysts and investors appear to initially rely more on basic prediction models than the expanded models that include DuPont components, industry grouping, and life-cycle calibration. While there is some evidence of investor surprise associated with the expanded models, hedge portfolios formed based on the expanded model predictions do not produce abnormal returns. [ABSTRACT FROM AUTHOR]

Using a natural experiment mandatorily requiring listed firms to disclose R&D activities in the context of China, this paper quantifies the effects of such mandatory disclosure on analyst forecasts, and show that mandatory R&D disclosure significantly decreases analyst forecast accuracy and increases the dispersion of analyst forecasts. Then, we present the underlying mechanisms driving our findings: the ability of analysts and detailed R&D information. Finally, our results are more pronounced in state-owned enterprises and industries with little competition. We show the economic significance of mandatory R&D information disclosure on capital markets. Overall, this study contributes to the literature by evaluating the unintended consequences of mandatory R&D information disclosure on analyst forecasts. [ABSTRACT FROM AUTHOR]

Copyright of Contemporary Accounting Research is the property of Canadian Academic Accounting Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

This article examines the use of annual earnings guidance as a mechanism used by managers to reduce the volatility of analyst earnings forecasts and allow them to report smooth earnings without missing quarterly analyst forecasts. Facing the pressure to meet or beat analyst forecasts and driven by the perceived capital market benefits of reporting a smooth earnings path, managers attempting to influence investors' earnings expectations over a longer horizon can issue annual guidance to smooth the time-series path of analyst forecasts, a strategy we term as "expectation smoothing." Our empirical results suggest that annual guidance reduces the volatility of analysts' multi-period forecasts, which in turn contributes to a smoother actual earnings and higher likelihood of meeting analysts' quarterly forecasts. We also find that issuing quarterly guidance does not affect the smoothness of analysts' earnings expectations and that managers with longer horizons are more likely to issue annual guidance, consistent with the unique long-term effects of annual earnings guidance. [ABSTRACT FROM AUTHOR]

We examine the properties of overprecise forecasts, i.e., forecasts with more digits after the decimal than the mode of forecasts issued by all analysts following a given firm in a given year. Contrary to conventional wisdom, we find that overprecise forecasts are less accurate than peer forecasts. The lower accuracy is related to inexperienced analysts, who tend to overweight their models and produce more specific, yet less accurate forecasts. Additional analyses indicate that analysts issue fewer overprecise forecasts as they gain experience and that experience mitigates the negative association between forecast overprecision and forecast accuracy. Forecast overprecision is also positively associated with forecast boldness and brokerage house prestige, two proxies for analyst overconfidence in their model outputs. We further document that the capital market partially sees through this inaccuracy, as stock prices react less to overprecise forecast revisions. By revealing a novel behavioral bias of sell-side analysts, our study challenges the view that form precision signals greater accuracy and informativeness. [ABSTRACT FROM AUTHOR]

We examine the effect of media competition on analyst forecast properties in an international setting using 113,436 firm-year observations from 32 countries spanning 2000 through 2012. We find that firms in countries with stronger media competition enjoy more accurate, less optimistically biased, and less dispersed analyst forecasts. The effects of media competition on the properties of analyst forecasts are stronger for firms with lower institutional ownership, for firms followed by fewer analysts or by analysts from smaller brokerage houses, and for firms with weaker financial performance. This suggests that media competition plays a more pronounced role in shaping the information environment when information from nonmedia channels is likely to be limited or of lower quality. Finally, we find that analysts in countries with stronger media competition tend to follow more firms, suggesting that stronger media competition reduces analysts' information acquisition costs, which in turn, improves the properties of their forecasts. [ABSTRACT FROM AUTHOR]

SYNOPSIS: The Medical Device Excise Tax (MDET) enacted a 2.3 percent tax on domestic sales of certain medical devices. Medical device firms suggested the tax would reduce profitability, leading to cuts in employees, research and development, and capital expenditures. However, we find that medical device firms engaged in more income tax avoidance in response to the MDET. Furthermore, medical device firms with high income tax avoidance made no significant cuts to investment spending or employees, whereas firms with low income tax avoidance significantly decreased investment spending and employees. Our findings suggest that some medical device firms used income tax avoidance as a substitute for reducing investment spending. Our results serve to inform both researchers and policymakers regarding the interplay between non-income taxes and income tax avoidance. [ABSTRACT FROM AUTHOR]

The many management guidance withdrawals during the COVID-19 pandemic have attracted considerable attention from the media, investors, and regulators. This study analyzes the determinants and consequences of these withdrawals. We find that guidance withdrawals are due to economic uncertainty, resulting from firms' exposure to the COVID-19 pandemic rather than poor financial performance. Also, the effect of COVID-19 exposure on guidance withdrawals is stronger when firms face higher litigation risk. Further, guidance withdrawals result in abnormally large trading volumes and high analyst forecast dispersion but do not harm stock prices or the level of analyst earnings forecasts. Overall we believe the findings have implications for understanding corporate disclosure practices during periods with heightened economic uncertainty. [ABSTRACT FROM AUTHOR]

Accounting theory and accounting researchers stress the importance of clean surplus accounting and comprehensive income to corporate valuation. However, casual observation suggests that sell‐side equity analysts routinely ignore other comprehensive income (OCI) in their forecasts and instead focus on forecasting earnings (before OCI). Using a sample of analyst reports, I first confirm that analysts normally omit forecasts of OCI or comprehensive income from their reports, consistent with analysts forecasting OCI as zero. I then predict and find that a zero forecast for OCI generally produces lower forecasting errors than alternative time‐series models, such as a random walk or AR(1) model, suggesting a rational reason why analysts take this approach. Finally, I predict and find that although analysts' point forecasts of future OCI are usually zero, their implied cost of equity estimates are consistent with analysts forecasting a positive variance for OCI. [ABSTRACT FROM AUTHOR]

The prior literature on analyst forecasts has focused almost exclusively on firms that just meet or beat the mean or median consensus analyst forecast, without much regard to alternative benchmarks within the forecast distribution. Anecdotal evidence suggests that there is institutional significance to the lowest (minimum) and highest (maximum) analyst earnings forecast. We rigorously explore whether these two new benchmarks actually have incremental significance and, if so, whether there are differences in how managers and investors perceive the importance of these three benchmarks (i.e., minimum, mean, and maximum). Consistent with the theory of investor ambiguity aversion, which predicts an asymmetric market response to good and bad news, our results support the notion that of the three benchmarks we explore, firms act most aggressively to exceed the minimum forecast, followed by the mean, and then finally the maximum. This order is consistently supported by the following evidence: the existence of higher incentives to beat the benchmark; the likelihood of earnings management to beat the benchmark; accrual reversal after firms just barely achieve each benchmark; accrual mispricing around each benchmark; and, finally, a faster incorporation into the stock price of the bad news that a firm misses the minimum than of the good news that a firm meets or beats the maximum. These findings fill a void in academic research on these two new benchmarks and offer a consistent explanation as to why the popular press and managers frequently highlight and discuss beating these benchmarks as a separate and notable achievement. This paper was accepted by Brian Bushee, accounting. Funding: Q. Xin gratefully acknowledges the financial support from the "Shenzhen Peacock Plan" start-up research [Grant GA11409004] and the Shenzhen Key Research Base of Humanities and Social Sciences [Grant KP191001]. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2022.4609. [ABSTRACT FROM AUTHOR]

We propose a pairwise measure of financial statement benchmarking (FSB) that captures the degree of overlap in the financial statement line items reported by two firms. We validate FSB by showing its association with actual peer choices of analysts and corporate boards. We then test the practical implications of FSB in the context of strategic peer selection by these parties. We find that analyst (board) chosen peers with low pairwise FSB are more likely to be strategic selections and that the set of peers assembled by an analyst (board) collectively having low FSB is associated with more optimistic earnings forecasts (higher CEO overpay). We also demonstrate alternative applications of FSB by aggregating the pairwise measure at the firm level and decomposing it into finer financial statement-specific components. Our evidence suggests that FSB can be a relevant tool for those using benchmarking applications, including practitioners and academics. Data Availability: Data are available from sources identified in the paper. JEL Classifications: M41. [ABSTRACT FROM AUTHOR]

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. [ABSTRACT FROM AUTHOR]

SYNOPSIS: Conservative analysts react more to negative news than positive news, and the market response is greater for forecast revisions from conservative analysts (Hugon and Muslu 2010; Keskek and Tse 2018). Little is known about how firms and managers respond to a lower benchmark resulting from having a more conservative analyst following. We examine the effect of analyst conservatism on firms just meeting or beating the benchmark via accrual-based earnings management. We find that firms with a more conservative analyst following have lower earnings benchmarks and are more likely to just meet or beat the consensus. Additionally, these firms meet the lower benchmark with lower levels of earnings management, with this effect being strongest in poor information environments. Collectively, our results suggest that management's benchmark meeting behavior is impacted by the conservatism of the firm's analyst following. JEL Classifications: G14; G24; M40; M41. [ABSTRACT FROM AUTHOR]

This paper examines how analysts incorporate other comprehensive income (OCI) and its components into their earnings forecasts. We first document that analysts' 1-year-ahead earnings forecasts are associated with OCI and OCI components having predictive ability; this suggests analysts (at least partially) incorporate this information into their forecasting. We then show that analysts are neither complete nor timely in incorporating OCI information into their forecasts, as several OCI components remain associated with analysts' forecast errors. Further, we document that higher uncertainty in firm performance exacerbates analysts' underreaction, evidencing a friction to full incorporation of OCI-related information. Finally, as evidence of where and when analysts derive OCI-related information, we document that analysts' forecast revisions correlate with the release of firms' 10-Ks and early 10-Qs (i.e., quarters one and two but not three). [ABSTRACT FROM AUTHOR]

This paper studies the impact of local religiosity on analyst forecast accuracy. Using the level of religious adherence as a proxy for religiosity in firm headquarter states, we find that analyst forecasts are more accurate for firms located in areas with stronger religious social norms. Our finding is robust to the inclusion of analyst and regional characteristics, firm, industry, and state fixed effects, controlling for earnings quality and audit quality, 2SLS-instrumental variable estimation, propensity score matching analysis, and a difference-in-difference test using firm headquarter relocations as a quasi-natural experiment. We further document a novel finding that religiosity has an "accentuating effect" on analyst forecast accuracy: religion can make a good thing better. Specifically, we find that local religiosity has a more pronounced positive effect on firms issuing management guidance, firms with better internal governance, better external monitoring, and having fewer agency problems. We also find the positive religiosity-forecast accuracy relation to be more pronounced for managers with greater tournament incentives and for analysts with more years of experience covering a specific firm. Finally, we find that analyst forecast revisions for firms in more religious areas have higher information content. Overall, our study shows that religiosity enhances the accuracy and information content of analyst forecasts. [ABSTRACT FROM AUTHOR]

The most prevalent forecasts of firms' long-term earnings issued by analysts are 2-yearahead earnings per share (EPS) estimates. When introduced by analysts, 2-year-ahead EPS estimates set market expectations for firms' future earnings. Subsequent revisions to these estimates are highly correlated with contemporaneous changes in stock prices. We examine whether such revisions are sufficiently predictable to enable investors to earn abnormal returns on hedged portfolios. We find that analyst forecast revisions are predictable and document an implementable strategy for investors. Consistent with investors' fixation on unscaled EPS, the strategy earns positive abnormal returns using unscaled EPS revisions but not when revisions are scaled by the level of the EPS estimate or the stock price. Abnormal returns are found for firms with low analyst coverage, consistent with a greater initial mispricing from analyst optimism for firms with poorer information environments. [ABSTRACT FROM AUTHOR]

Prior studies find that analysts tend to bias their forecasts upward in poor information environments and downward in rich information environments, consistent with attempts to curry favor with management. We find that investors anticipate this behavior by reducing their response to upward forecasts in poor information environments and downward forecasts in rich information environments. Using Hugon and Muslu's measure of analyst conservatism as an ex ante indicator of individual analysts' forecast bias tendencies, we show that the stronger return response they find to conservative analysts' forecast revisions is restricted to poor information environments, where optimistic analyst bias is prevalent. Our results suggest that analysts pay a price in market influence when their forecasts reinforce analysts' typical forecast bias for the firm's information environment. Conversely, analysts whose forecasts conflict with the typical bias for the firm are rewarded with larger than average return responses. [ABSTRACT FROM AUTHOR]

We propose a measure of disagreement, which reflects differences of opinion as opposed to information asymmetry, that can be extracted from sequences of analyst forecasts. Using a Bayesian theoretical framework, we prove that when analysts agree, a regression of an analyst's forecast on the previous forecast issued by another analyst should have a slope coefficient of one. The magnitude of the estimated regression coefficient's deviation from one is then employed as a disagreement measure. We validate the measure using tests tied to predicted relations between disagreement and trading volume and bid-ask spreads. Finally, we employ our measure to test for associations between disagreement and expected returns predicted by antecedent theoretical studies. [ABSTRACT FROM AUTHOR]

We explore the relation between financial reporting uniformity and comparability. We also examine the effect of uniformity on analyst coverage, analyst forecast accuracy and analyst forecast dispersion. We develop a Compustat‐based financial statement account uniformity measure based on the presentation of common financial statement line items. We define uniformity using a Jaccard similarity index where a firm's non‐missing Compustat data items are compared to a prototypical firm for that industry year. We emphasize the conceptual difference between uniformity and comparability, and our tests do not show a significant association between uniformity and output‐based accounting comparability. However, we find that the association between account uniformity and comparability becomes positive in high research and development firms, while it becomes negative in firms with higher managerial discretion. We explore the association between uniformity and information processing efficiencies, and we show that our uniformity measure is positively associated with analyst coverage. Furthermore, we partition our uniformity measure into separate income statement and balance sheet components. We find that income statement uniformity is associated with higher forecast accuracy and lower forecast dispersion, while balance sheet uniformity is associated with greater analyst coverage. Finally, we provide further support for these findings using an XBRL‐based uniformity measure. [ABSTRACT FROM AUTHOR]

We explore how voluntary disclosure on an Internet platform affects analyst behaviour. We find that the higher the level of voluntary disclosure on the 'hudongyi' platform of China's Shenzhen Stock Exchange, the greater the error in analyst forecasts. Voluntary disclosure on this platform provides analysts with heuristic clues, and heuristic cognitive biases increase analysts' forecasting errors. In addition, social media has a partial mediation effect between voluntary disclosure and analyst forecast errors. [ABSTRACT FROM AUTHOR]

This paper provides a novel look at capital flow determinants by assessing the role of expectations and media sentiments. Analyzing eight emerging market economies, we assess the effects of macroeconomic expectations and disagreement among professionals and various media-based sentiment indicators. Our results show that survey and sentiment indicators which are available in real time contain useful information about capital flow dynamics which go beyond the effects of conventional push and pull factors for all countries we analyze. News sentiment related to the exchange rate have the strongest effects on capital flows. Finally, we identify substantial heterogeneity across countries. • We analyze effects of expectations, uncertainty and sentiment on capital flows. • We assess surveys and media-based sentiment. • We include both mean and dispersion measures, for domestic and global factors. • Survey and sentiment indicators aid to explain capital flows to emerging economies. • News sentiment related to the exchange rate have the strongest effects on capital flows. [ABSTRACT FROM AUTHOR]

On April 28, 2003, ten of the largest investment banks reached an agreement with the Securities and Exchange Commission and other regulatory bodies regarding alleged misconduct of security analysts. This agreement, called the Global Research Analyst Settlement, allocated $460 million to source independent analyst research. Unlike other forms of analyst research, this research was not financed through investment banking or trading commissions and was theoretically "unbiased research". We compare independent research funded by the Global Settlement to research provided by the same firms that was not funded by the Global Settlement. Research funded by the Global Settlement appears to be of lower quality than non-funded research produced by the same set of firms, suggesting that unbiased research does not necessarily generate higher quality research. More specifically, we find that quality declined in the later years of the Global Settlement period when there was no expectation of future funding for this research, commonly referred to as the horizon effect. [ABSTRACT FROM AUTHOR]

Prior literature suggests analysts have a very poor understanding of asymmetric cost behaviour ('ACB') and 'converge to the average' when incorporating this behaviour in forecasts. However, we show that the extent of bias arising from sticky costs is greater for firms ('Defenders') employing strategic approaches for which ACB is less commonly observed, and that ACB typically has no association with forecast errors for firms who typically demonstrate high degrees of cost stickiness ('Prospectors'). Our findings are consistent with analysts having a meaningful understanding of ACB and cross‐sectional differences in the likelihood of its incidence. [ABSTRACT FROM AUTHOR]

Using the economic policy uncertainty (EPU) index of Baker et al. (2016), we examine the influence of EPU on the characteristics of USD/JPY exchange rate forecasts. Our sample period, which spans two decades, incorporates a range of economic and political conditions for the USA and Japan. Consistent with higher EPU engendering a more complex information environment, that introduces noise into the forecasting process, our results clearly demonstrate that analyst forecast errors, and forecast dispersion, increase with EPU. The empirical findings are consistent across forecast horizons ranging from 1 month to 1 year. This has important implications for market participants who use exchange rate forecasts when making business and investment decisions. [ABSTRACT FROM AUTHOR]

As stock index adjustments comprise a basic system of capital market, their potential influence on analysts’ earnings forecasts is worthy of research. Based on a research sample of 23 adjustments to the CSI 300 Index from June 2007 to June 2018 and the backup stocks announced during the same period, this study examines the impact of additions to stock index on analysts’ forecast optimism using a staggered difference-in-differences model. The research results show that after stocks are added to the stock index, analysts’ earnings forecast optimism about these stocks increases significantly. Cross-sectional analysis indicates that this increase is more significant when the market is bullish, institutional ownership is low, the ratio of listed brokerage firms is low, star analyst coverage is low, firms show seasoned equity offering activity, the ratio of analysts from the top five brokerage firms ranked by commission income is high, and the analysts’ brokerage firms are shareholders. However, analyst-level tests find that analysts’ ability helps to reduce the impact of additions to stock index on earnings forecast optimism. Furthermore, additions to stock index significantly increase analyst coverage and forecast divergence. Economic consequences tests find additions to stock index significantly increases stock price synchronization, which is partly mediated by analysts’ earnings forecast optimism. This study enriches the literature on the impact of basic capital market systems and analyst behavior. The findings suggest that investors should rationally evaluate analysts’ earnings forecasts for stocks added to the stock index and obtain further information from various channels to improve asset allocation efficiency.

Labor protection increases employees’ stability and strengthens their monitoring role, improving firms’ information environment and increasing analysts’ earnings forecast accuracy. Using the implementation of China’s Labor Contract Law as a quasi-natural experiment, we find that labor protection significantly improves analyst forecasts. This positive impact is stronger when agency problems are weaker, board independence is greater, corporate reputation is better and industry competition is more intense. Enhanced labor protection significantly reduces firms’ business risk and accrual-based earnings management, decreases stock price synchronicity and increases market pricing efficiency. Our findings of significant impacts of China’s Labor Contract Law on analysts’ forecasting behaviors offer important guidance for promoting the development of the Chinese capital market and policy making in labor protection.

Firms consider external information such as peer performance data and analyst forecasts when setting performance targets because this information provides relevant benchmarks about agents' productivity. Using the EPS targets of S&P 1500 firms from the 2006-2014 period, we examine whether firms' reliance on certain benchmarks depends on the relative informativeness of the external information. We find that firms put greater weight on analyst forecasts than on peer performance information because their profitability is less likely to comove with that of their peer firms. We also find that the use of forecasts increases in settings where analyst forecasts are more informative regarding focal firms' profitability. [ABSTRACT FROM AUTHOR]

This study investigates whether analysts exhibit accrual-related biases in forecasting earnings in the presence of conflicts of interest arising from business group affiliation. Our findings reveal that chaebol-affiliated analysts are more likely to overreact to accruals than do independent analysts by overestimating the persistence of accruals. Notably, affiliated analysts' accrual-related biases are not reduced with analysts' experience but intensify when analysts have stronger incentives to provide favorable forecasts for member firms. This suggests a possibility that in the presence of conflicts of interest analysts do not fully incorporate the implications of accruals into their forecasts, potentially with an intention to benefit group interests. In additional analyses, we find that the presence of affiliated analysts does not exacerbate accrual mispricing, which suggests that investors do not take affiliated analysts' biased forecasts at face value. We also provide evidence that despite issuing less accurate forecasts than unaffiliated analysts, affiliated analysts do not necessarily encounter more career disadvantages. [ABSTRACT FROM AUTHOR]

This study examines the effect of high-speed rails on analyst earnings forecasts in Chinese context. The results based on a difference-in-difference design show that the introduction of high-speed rail improves analyst earnings forecast accuracy. The positive association is stronger for firms located in regions with less developed institutional environments, firms with fewer intangible assets, and firms located farther away from information centers. In addition, high-speed rails increase analysts' likelihood and frequency of site visits. Overall, we extend the literature on economic geography and financial analysts, and shed lights on how transportation infrastructure facilitates information exchange in capital markets. [ABSTRACT FROM AUTHOR]

We show analysts' own earnings forecasts predict error in their own forecasts of earnings at other horizons, which we argue provides a measure of the extent to which analysts inefficiently use information. We construct our measure by exploiting two sources of variation in analysts' incentives: (i) more recent forecasts have greater salience at the time of the earnings release so accuracy incentives are higher (lower) at shorter (longer) forecast horizons and (ii) analysts have greater incentives for optimism (pessimism) at longer (shorter) horizons. Consistent with these incentives affecting the incorporation of information into forecasts, we document (i) current year forecasts underweight (overweight) information in shorter (longer) horizon forecasts and (ii) the mis-weighting is more pronounced when recent news is negative—when analysts have greater (weaker) incentives to incorporate the news into shorter (longer) horizon forecasts. Finally, returns tests suggest that forecasts adjusted for the inefficiency we document better represent market expectations of earnings. [ABSTRACT FROM AUTHOR]

Consensus estimates, formed by taking an average of analyst forecasts, play an important role in capital markets (e.g., provide investors with a proxy for earnings expectations). We show I/B/E/S, a prominent information intermediary, removes 6% of one‐quarter‐ahead earnings forecasts before calculating the consensus, and among the 23% of firm‐quarters with at least one forecast removed, this figure rises to 16%. We provide evidence suggesting that I/B/E/S subjectively applies policies that govern its removal decisions and accepts feedback from firms that contributes to this subjectivity. Specifically, we find optimistic forecasts are removed more frequently than pessimistic forecasts, and such asymmetry increases further when removals allow firms to meet or beat the consensus. Furthermore, we find that these effects are more pronounced when managers' incentives to just meet or beat the consensus are stronger (i.e., higher subsequent insider sales or higher compensation delta), or managers have greater ability to influence I/B/E/S. Lastly, we demonstrate that these subjective removals benefit I/B/E/S by improving consensus accuracy, explaining why I/B/E/S is willing to be influenced by firms. [ABSTRACT FROM AUTHOR]

Because security analysts, who serve as brokers between public firms and investors, arrive at their forecasts by incorporating guidance from managers, there is immense pressure on the managers to meet or beat analyst earnings forecasts; moreover, investors reward (penalize) firms for exceeding (missing) analyst forecasts. Reasoning that decisions taken in response to analyst forecasts involve discretionary budgets, the authors study four contingent conditions under which quarterly analyst forecasts drive unanticipated adjustments to advertising and R&D budgets, and the long-term consequences of these budgetary changes. The choice of contingent conditions is related to agency theory-driven concepts of monitoring and bonding costs. Results from a panel data set of 515 firms and a hierarchical Bayesian model that provides firm-level coefficients show that both artificially imposed incentives on managers (monitoring costs) and personal career management concerns (bonding costs) moderate the extent to which managers react to analyst forecasts. Specifically, (1) bonus versus equity proportion of CEO compensation enhances the likelihood of managers reacting to analyst forecasts with unanticipated decreases in advertising and R&D budgets; (2) output experience of CEOs decreases this likelihood; (3) throughput experience of CEOs increases this likelihood; and (4) increasing marketing and R&D intensity decreases this likelihood. The authors also find that the unanticipated adjustments in advertising and R&D budgets adversely affect long-term firm returns and risk. [ABSTRACT FROM AUTHOR]

Whereas practitioners often recommend that firms incorporate forward-looking information in setting executive performance targets, academic studies have mainly focused on past information (e.g., past performance) as information sources. Using analysts' annual earnings forecasts as the main proxy for market-based forward-looking information, we find evidence that boards of S&P 1500 firms exploit forward-looking information in setting targets for executive annual bonus contracts. Furthermore, we find that the positive association between analyst forecasts and firms' bonus target revisions is more pronounced when forecasts are more informative about future firm performance and when they are less likely to be influenced by managers. Our results are robust to a battery of sensitivity tests. Data Availability: Data are available from the public sources indicated in the text. [ABSTRACT FROM AUTHOR]

This paper builds an agent-based model to study the impact of analyst competition on analyst optimism. Two strategies (a catering strategy and a pressure strategy) are used to model analysts conflicts of interest between listed corporations and institutional clients. The finding suggests that the relationship between competition and analyst optimism is nonlinear. Low-level competition generates more analyst unbiased forecasts. However, the condition of no competition or high-level competition generates more analyst optimistic forecasts. The empirical test also confirms that analysts issue less biased earnings forecasts under the condition of low-level competition. [ABSTRACT FROM AUTHOR]

This study examines the role of market efficiency on international differences in the usefulness of the implied cost of capital (ICC) to measure expected stock returns. The analysis exploits cross-country differences in market efficiency around the world using a variety of empirical measures of market efficiency. A key methodological contribution of this paper is to assess the quality of the ICC as estimate of expected returns by evaluating its forecast error for subsequent stock returns. The results show that the accuracy of the ICC as measure of expected stock returns is positively associated with the countries' level of market efficiency. [ABSTRACT FROM AUTHOR]

We find that a composite implied cost of capital (ICC) estimate – based on the earnings forecasts generated by cross‐sectional models – is highly correlated with future realised returns in both portfolio‐ and regression‐based tests. By contrast, we find very little evidence for an association with future realised returns for an ICC estimate based on analyst earnings forecasts. We also document the time‐varying nature of expected returns and risk premia, and provide up‐to‐date estimates of an implied Australian market risk premium. [ABSTRACT FROM AUTHOR]

We construct a measure of the speed with which forecasts issued by sell‐side analysts accurately forecast future annual earnings. Following Marshall, we label this measure earnings information flow timeliness (EIFT). This measure avoids the aggregation problem inherent in price‐based measures of information efficiency. We document large variation in EIFT across firm‐years, and show that EIFT is positively associated with the extent of analyst following, consistent with increased analyst coverage improving the speed with which earnings‐related information is recognised. We also find that EIFT is higher for firm‐years classified as 'bad news' (i.e., where analysts' forecasts at the start of the financial period exceed the reported outcome). However, when we separately consider instances where analysts appear to forecast non‐GAAP (or 'street') earnings rather than GAAP earnings, we find that the greater timeliness of bad news is concentrated among observations where analysts forecast non‐GAAP earnings, where unusual items are typically excluded. We conclude that the market for accounting information is more efficient for negative operating outcomes than for negative outcomes reflecting unusual items. [ABSTRACT FROM AUTHOR]