Earnings Announcements, Differences of Opinion and Management Guidance

Keskek, Sami; Rees, Lynn L.; Thomas, Wayne B.

doi:10.1111/jbfa.12037

Cited by 6 publications

(6 citation statements)

References 66 publications

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“…Unlike forecast accuracy, the desirability of unbiased management forecasts is more ambiguous. Arguably, forecasts that are accurate and un‐biased (neither upwardly nor downwardly biased) are most desirable; however, the market typically rewards firms when actual results meet or exceed analysts’ expectations, and analysts’ expectations are shaped by management guidance (Matsumoto, ; Richardson et al., ; Cotter et al., ; Keskek et al., ). Downwardly biased forecasts are more likely to be exceeded and thus rewarded.…”

Section: Introductionmentioning

confidence: 99%

Management Guidance Pre‐ and Post‐Restatement

Gordon¹,

Henry²,

Li³

et al. 2014

Business Fin & Account

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We examine whether the quality of restating firms’ management guidance differs in periods before and after restatement announcements. While characteristics of restating firms and the consequences of restatement have been a central topic in accounting and auditing research, the quality of management guidance around restatements is less well understood. We consider two competing characterizations of the link between management forecast accuracy and bias and restatement (an event that tends to signal poor financial controls): “Forecast–Opportunism Explanation” and “Forecast–Ability Explanation”. Under the Forecast–Opportunism Explanation, pre‐restatement weaknesses in financial controls enable managers to manipulate earnings toward forecasts and to meet or exceed opportunistically biased forecasts, and the post‐restatement strengthening of financial controls constrains opportunistic behavior. Under the Forecast–Ability Explanation, pre‐restatement weaknesses in financial controls impede managers’ ability to issue accurate forecasts, and post‐restatement improvements remove impediments so that the accuracy of forecasts improves; forecast bias remains unaffected. Evidence indicates that before a restatement, restating firms’ forecasts are more accurate and relatively more downwardly biased than control firms’ forecasts. Post‐restatement, restating firms have less accurate and less downwardly biased management guidance. Our overall results are consistent with the Forecast–Opportunism Explanation.

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Section: Introductionmentioning

confidence: 99%

Management Guidance Pre‐ and Post‐Restatement

Gordon¹,

Henry²,

Li³

et al. 2014

Business Fin & Account

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show abstract

“…This analysis is similar to the analysis performed inKeskek et al (2013), but rather than considering analyst EPS dispersion and its predictive impact on the expected earnings abnormal returns, we consider the skewness of analyst EPS estimates and its correlation with realized return skewness, as well as optionimplied skewness. C 2016 John Wiley & Sons Ltd…”

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confidence: 99%

Too Good to be True? An Analysis of the Options Market's Reactions to Earnings Releases

Ray

2016

Business Fin & Account

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Using option implied risk neutral return distributions before and after earnings announcements, we study the option market's reaction to extreme events over earnings announcements. While earnings announcements generally reduce short‐term uncertainty about the stock price, very good news does not reduce uncertainty and slightly bad news actually increases uncertainty. We also find that left tail probabilities decrease over earnings releases while right tail probabilities increase. We interpret these findings as evidence of maintained investor expectations that very good news is generally not released during earnings announcements, combined with skepticism in the form of lingering uncertainty at the release of such very good news.

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“…We conjecture that analysts face two conflicting incentives in walking down their forecasts over the course of the year. The first incentive is to please management by increasing the likelihood that the firm reports good news at the earnings announcement (Ke & Yu, 2006; Keskek et al, 2013; Richardson et al, 2004; Tse & Yan, 2008). Matsumoto (2002) argues that firms appreciate pessimistic analysts who issue forecasts that are easier to beat, consistent with the well-established evidence that firms meeting or beating analysts’ forecasts realize a market premium (Bartov, Givoly, & Hayn, 2002; Lopez & Rees, 2002).…”

Section: Related Literature and Hypothesis Developmentmentioning

confidence: 99%

“…Later studies use forecast dispersion as a proxy for earnings uncertainty and show that forecast optimism increases with dispersion (Gu & Wu, 2003; Zhang, 2006). Specifically, prior research documents that analyst forecasts are optimistically biased for firms with high analyst forecast dispersion and pessimistically biased for firms with low analyst forecast dispersion (Keskek, Rees, & Thomas, 2013; Tse & Yan, 2008). We label firms as having poor information environments when their analyst forecast dispersion is high and rich information environments when forecast dispersion is low.…”

Section: Introductionmentioning

confidence: 99%

Does Forecast Bias Affect Financial Analysts’ Market Influence?

Keskek

Tse

2016

Journal of Accounting, Auditing & Finance

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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.

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Earnings Announcements, Differences of Opinion and Management Guidance

Cited by 6 publications

References 66 publications

Management Guidance Pre‐ and Post‐Restatement

Management Guidance Pre‐ and Post‐Restatement

Too Good to be True? An Analysis of the Options Market's Reactions to Earnings Releases

Does Forecast Bias Affect Financial Analysts’ Market Influence?

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