The Quality of Analysts’ Earnings Forecasts During the Asian Crisis: Evidence from Singapore

Abstract

We bring together three disparate strands of literature to develop a comprehensive empirical framework to examine the efficiency of security analysts' earnings forecasts in Singapore. We focus specifically on how the increased uncertainty and the negative market sentiment during the period of the Asian crisis affected the quality of earnings forecasts. While we find no evidence of inefficiencies in the pre-crisis period, our results suggest that after the onset of the crisis, analysts (1) issued forecasts that were systematically upward biased; (2) did not fully incorporate the (negative) earnings-related news; and (3) predicted earnings changes which proved too extreme. Copyright Blackwell Publishers Ltd, 2003.

International evidence on the relative importance of the determinants of earnings forecast accuracy

“…14 According to Hope (2003) and Abarbanell and Lehavy (2003) management's incentive to take earnings "baths" could contribute to explaining the observed optimistic bias in FAFs. The results reported by Loh and Mian (2002) indicate that firms in Singapore took advantage of the 1997 financial crisis to withdraw some assets from their balance sheets, leading to significant gaps between reported and forecast earnings.…”

The impact of analyst sentiment on UK stock recommendations and target prices

“…Ang and Ma (2001) find that analysts failed to anticipate underlying firm weaknesses before the Asian Financial Crisis and to make appropriate adjustments as the crisis hit. Further, Loh and Mian (2003) find that Singaporean analysts' earnings forecasts during the Asian financial crisis were systematically optimistic, and that analysts' earnings forecast changes exceeded actual earnings changes, and did not incorporate negative earnings-related news. However, Sidhu and Tan (2011) find that analysts sharply revised earnings forecast levels downwards in response to the Global Financial Crisis, tending towards over-pessimism, though observed an upward trend in buy recommendations thereafter as stocks had greater upside price potential.…”

“…Building upon the existing literature, we expect that analysts' narrative sentiment will map less clearly on to report outputs during a period of economic volatility due to behavioural influences which may make analysts less effective and their forecast accuracy poorer. We contribute to the literature concerning analysts' reports during the crisis, not by only examining analysts' outputs (Ke and Yu, 2009;Ang and Ma, 2001;Loh and Mian, 2003;Sidhu and Tan, 2011;Loh and Stulz, 2014), but also by modelling the sentiment themes that drive those outputs.…”

The use of information by financial analysts during a financial crisis

“…Chang, Cho, and Shin () show that the information asymmetry of Korean firms is lower after the crisis than before. Earlier Loh and Mian ()) find that forecasts made during the Asian crisis in Singapore contained systematic biases and analysts' forecasts did not fully incorporate negative earnings‐related news. Their findings are consistent with those of Arand and Kerl () who show that the accuracy of analysts' forecasts significantly deteriorates during a crisis.…”

“…Arand and Kerl () find that analysts provide a positive view about corporate performance and stock return during the recent financial crisis. Like Loh and Mian () who examine the impact of the Asian Crisis on analysts' performance and Sidhu and Tan () who examine the performance of the U.S. and Australian analysts during their recent financial crisis. Arand and Kerl () suggest that analysts' accuracy with respect to target price and earnings forecast deteriorate during a crisis period.…”