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Financial analysts as users of accounting information Evidence about forecast revision activity after earnings announcements

Financial analysts as users of accounting information Evidence about forecast revision activity... Purpose – To examine whether both the value relevance of accounting information, and the quality of earnings affect financial analysts' revisions of forecast annual earnings per share soon after an earnings release. Design/methodology/approach – For firms whose accounting earnings provide either a basis for firm valuation or new information, analysts are predicted to revise earnings forecasts in response to the magnitude of surprise in the earnings release. Using publicly available data, regression analysis explores the influence of earnings response coefficients (ERCs), unexpected earnings, and interactions between ERCs, the association between earnings and returns, and unexpected earnings on forecast revisions after earnings announcements. Findings – Empirical tests demonstrate a positive relation between the percentage of analysts revising forecasts soon after interim earnings announcements and firm‐specific ERCs, the interaction between the magnitude of earnings surprises, ERCs, and earnings‐returns associations, and pre‐announcement dispersion in forecasts. The results suggest that usefulness of earnings releases is related to the magnitude of new information in the release, the persistence of earnings innovations, the firm‐specific mapping between earnings and returns, and prior uncertainty about earnings. Research limitations/implications – This paper examines forecast revisions only soon after earnings announcements. Future research should examine more general determinants of analysts' forecast revision activity. Originality/value – This paper provides evidence about determinants of forecast revision frequency, a measure of how actively financial analysts provide information, an extension of prior research that focuses on analyst following as a measure of information environments. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Managerial Finance Emerald Publishing

Financial analysts as users of accounting information Evidence about forecast revision activity after earnings announcements

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References (28)

Publisher
Emerald Publishing
Copyright
Copyright © 2005 Emerald Group Publishing Limited. All rights reserved.
ISSN
1743-9132
DOI
10.1108/17439130510584856
Publisher site
See Article on Publisher Site

Abstract

Purpose – To examine whether both the value relevance of accounting information, and the quality of earnings affect financial analysts' revisions of forecast annual earnings per share soon after an earnings release. Design/methodology/approach – For firms whose accounting earnings provide either a basis for firm valuation or new information, analysts are predicted to revise earnings forecasts in response to the magnitude of surprise in the earnings release. Using publicly available data, regression analysis explores the influence of earnings response coefficients (ERCs), unexpected earnings, and interactions between ERCs, the association between earnings and returns, and unexpected earnings on forecast revisions after earnings announcements. Findings – Empirical tests demonstrate a positive relation between the percentage of analysts revising forecasts soon after interim earnings announcements and firm‐specific ERCs, the interaction between the magnitude of earnings surprises, ERCs, and earnings‐returns associations, and pre‐announcement dispersion in forecasts. The results suggest that usefulness of earnings releases is related to the magnitude of new information in the release, the persistence of earnings innovations, the firm‐specific mapping between earnings and returns, and prior uncertainty about earnings. Research limitations/implications – This paper examines forecast revisions only soon after earnings announcements. Future research should examine more general determinants of analysts' forecast revision activity. Originality/value – This paper provides evidence about determinants of forecast revision frequency, a measure of how actively financial analysts provide information, an extension of prior research that focuses on analyst following as a measure of information environments.

Journal

International Journal of Managerial Finance – Emerald Publishing

Published: Mar 1, 2005

Keywords: Forecasting; Earnings; Accounting information

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