No abstract

We examine the informativeness of analyst forecast revisions that are directionally inconsistent with prior stock price movements (sign-inconsistent revisions). Sign-inconsistent revisions represent approximately one-half of the forecast revisions from 1995 through 2010. Our tests indicate that signinconsistent revisions are less informative than are sign-consistent revisions. Sign-inconsistent revisions are less likely to be closer to actual earnings realizations and they generate smaller stock price reactions. We also find evidence that sign-inconsistent revisions are associated with analysts' economic incentives to generate trading volume and their behavioural limitations related to information uncertainty. These results suggest that sign-inconsistent revisions do not necessarily benefit investors.

No abstract

No abstract

Purpose – The purpose of this paper is to extend prior findings on firms’ rounding up net income numbers to meet cognitive reference points and to examine whether segment-level earnings exhibit similar unusual patterns. Design/methodology/approach – This study is an archival research based on a sample of US public firms that report segment data between 1998 and 2011. The authors use Benford’s law to establish benchmarks for expected frequency of each number on the second digit of segment earnings and test whether the actual distributions deviate from expectations. Findings – The authors find more zeros and fewer nines than expected by chance in the second-from-the-left most digit for segment earnings numbers of US public firms, suggesting that segments round up earnings to meet cognitive reference points. The results complement the existing studies by showing that the rounding up of earnings not only exists at the firm level but also at the segment level, probably because subdivision managers have motivation to exceed certain reference points when reporting earnings. Research limitations/implications – As the authors cannot observe the contracts received by divisional managers, the authors rely on measures related to operating diversity to capture internal agency costs. Practical implications – The findings suggest internal and external auditors should pay close attention to segments that are suspected of earnings management, i.e. segments that report zeros on the second digit of revenues or earnings. Increased auditor attention is especially necessary for profitable segments operating in highly diversified multi-segment firms. Originality/value – The authors find that unusual patterns in segment reporting are more prominent in firms that operate in multiple and dissimilar segments, suggesting that higher internal agency conflict might lead to the rounding up of earnings.