financial analysts

This study investigates how the recent mandatory adoption of IFRS affects financial analysts’ information environment, specifically the accuracy of analysts’ earnings forecasts in Korean market. Financial ana lysts are among the most important and sophisticated users of financial reporting service, and therefore examining the effects of IFRS adoption on analysts would enhance our understanding of the consequences of IFRS adoption. Especially, IFRS adoption in Korea provides a great opportunity to examine the issue because IFRS adoption produce more significant differences in financial reporting practices in Korea than many other countries where IFRS adoption has taken places. Before IFRS adoption, the primary financial statements of Korean firms required to be disclosed are standalone (unconsolidated) financial statements. However, IFRS adoption designate consolidated financial statements as the primary financial statements, which exert a strong influence on Kore an firms’ financial reporting. Although many previous studies examined the issue, it is still controversial how mandatory IFRS adoption would affect financial analysts. On the one hand, proponents of IFRS claim that IFRS adoption has improved analysts’ information environment, on the grounds that IFRS enhances the disclosure quality and transparency and/or increases the comparability of financial reporting (Bae, Tan, & Welker, 2008; Barth, Landsman, & Lang, 2008). On the other hand, opponents argue that IFRS adoption render financial reporting less informative, because “one size fits all” IFRS might be less reflective of domestic firms’ unique financial position and operating performance (Ball, 2006) and thereby, IFRS adoption reduce the quality of analysts ’ information.

Prior studies in this area focused mainly on the developed markets. With global financial contagion around the world, emerging and frontier markets peculiarity sometimes viewed as investors haven becomes of interest. This research has potential to contribute knowledge and to build on previous studies. For example, Karamanou (2012) suggested that future research should examine the link between the financial analysts and other market variables, in both emerging and the frontier markets. However, the study will go further to examine analysts‟ role in the frontier markets. The research will also contribute by extending the models, methods and analysis tools that were used in previous studies. Credible and transparent financial reporting is essential for efficient resource allocation in the capital markets. Financial reporting should reduce the information asymmetry that exist between managers and outside stakeholders. The financial analysts do not only play a complementary intermediation role to reduce this information gap, but expected to exhibit independence and objectivity devoid of incentive conflicts in their reports and recommendations. The recent global financial crisis reflects the relevance of an efficient capital markets and the important consequences that market frictions could have on the society. The series of financial reporting scandals around the world has major consequences for company employees - jobs and pensions, and financial markets. It is equally significant not to quickly forget the events which led to introduction of International Financial Reporting Standards (IFRS). These events further highlight the necessity for high quality financial intermediation. Financial analysts are important intermediaries that are generally expected to have superior information processing skills. However, because financial analysts tend to have incentives to provide inaccurate and bias information to outsiders in order to impress company management, it is still arguable whether analysts actually add value to the society.

This paper examines the long-run performance of French initial public offerings (IPOs) carried out between 1991 and 2005. Using various methodologies, we found that IPOs in our sample performed poorly relative to the comparison portfolios over the 1991–2005 horizon in contrast to that reported by prior studies of the French market. This abnormal long-run performance is more severe for orphan IPOs (those without financial analysts’ recommendations) than for non-orphan IPOs the first year following the offerings (a statistically significant difference). In contrast to the widely held belief, this evidence suggests that analyst coverage is indeed not important to the issuing firm. Investors pay more attention to non-orphan IPOs when they are not book built, venture capital backed, underwritten by a large syndicate and less underpriced. Over the 1991–2005 period, an analyst’s affiliation does not appear to matter. This result is inconsistent with the conflict of interest hypothesis. During the first year of issuance, analysts’ recommendations are associated with the success of a newly public firm. However, once we extend the horizon to 3 or 5 years after the issuance, we can find that analysts’ recommendations are not significantly related to the long-run performance of IPOs.

Company valuation models attempt to estimate the value of a company in two stages: (1) comprising of a period of explicit analysis and (2) based on unlimited production period of cash flows obtained through a mathematical approach of perpetuity, which is the terminal value. In general, these models, whether they belong to the Dividend Discount Model (DDM), the Discount Cash Flow (DCF), or RIM (Residual Income Models) group, discount one attribute (dividends, free cash flow, or results) to a given discount rate. This discount rate, obtained in most cases by the CAPM (Capital asset pricing model) or APT (Arbitrage pricing theory) allows including in the analysis the cost of invested capital based on the risk taking of the attributes. However, one cannot ignore that the second stage of valuation that is usually 53-80% of the company value (Berkman et al., 1998) and is loaded with uncertainties. In this context, particular attention is needed to estimate the value of this portion of the company, under penalty of the assessment producing a high level of error. Mindful of this concern, this study sought to collect the perception of European and North American financial analysts on the key features of the company that they believe contribute most to its value. For this feat, we used a survey with closed answers. From the analysis of 123 valid responses using factor analysis, the authors conclude that there is great importance attached (1) to the life expectancy of the company, (2) to liquidity and operating performance, (3) to innovation and ability to allocate resources to R&D, and (4) to management capacity and capital structure, in determining the value of a company or business in long term. These results contribute to our belief that we can formulate a model for valuating companies and businesses where the results to be obtained in the evaluations are as close as possible to those found in the stock market.

This paper examines the long run performance of French IPOs carried out between 1991 and 2005. By using various methodologies, we find that IPOs in our sample performed negatively relative to comparison portfolios over the 1991;2005 horizon, unlike prior studies applied to French market. This abnormal long run performance is much severe for orphans’ IPOs (without financial recommendation) than non orphans’ IPOs from one to three;year horizon (statistically significant). The evidence suggests that analyst coverage is indeed important to issuing firm but the market do not fully incorporate the perceived value of this coverage. Further analysis reveals that this outperformance by non orphan stems from high coverage. Investors pay more attention for non orphan when IPOs are venture capital backed, with a big underwriting syndicate and low underpriced. Over the 1991;2005 period, analyst’s affiliation does not appear to matter. This result is inconsistent with the conflict of interest hypothesis. We establish that analyst recommendations are significantly related to long run performance of IPOs. Then we corroborate the crucial role of financial analysts in producing and interpreting IPOs’ financial releases.

A broad literature has investigated the governance role of financial analysts, but presents somewhat mixed evidence. For example, consistent with the premise that financial analysts facilitate intra-industry information transfer, Piotroski and Roulstone (2004) find that analyst forecasting activity is positively associated with stock return synchronicity, suggesting that stock prices incorporate less firm-specific information (which leads to lower stock price informativeness). However, Ayers and Freeman (2003) show that prices of firms with higher analyst following incorporate future earnings more rapidly than firms with lower analyst coverage, implying a positive relation between analyst coverage and stock price informativeness. In this study, we examine the association between analyst coverage and stock price informativeness by considering the regional heterogeneity of legal institutions in China.

Table 2 shows financial analysts’ recommendations as a whole (buy; hold and sell) made within the three years following the IPO date. Long run performance is calculated over the five, three and one-year horizon. We find, over the 1991-1998 period, that market participants do not distinguish between recommendations made by affiliated analysts and those made by unafilliated analysts. Buy-and-hold returns do not reveal any statistically significant difference between affiliated and unaffiliated analysts’ recommendations whereas the Fama- French model shows that investing an equal amount in portfolios covered by affiliated analysts give a -0,24% return per month that is statistically significant (at 5% level) compared to portfolios covered by unaffiliated analysts (monthly return of 0,85%, statistically significant at 1% level). Internet bubble period (1999-2000) presents similar findings. Buy- and-Hold abnormal returns and Fama-French model agree about the lack of significant difference between affiliated and unaffiliated analysts’ recommendations.

Design/methodology/approach – The analysis was divided into two stages. In the first stage, we examined intangible asset taxonomies (i.e., structural, relational, and human capital) through content analysis by counting repeated key terms related to each category of intangible assets cited in the financial analysts’ reports. In the second stage, we analyzed the influence of intangible asset proxy variables on coverage, forecasting errors, and accuracy of earnings per share forecasts by financial analysts. Findings – In the first stage, the results suggested that analysts cited more terms related to the structural capital category, particularly the terms “strategy” and “mission.” In the second stage, the results pointed to the absence of statistically significant relationships between the studied variables. Therefore, it is possible to infer that although financial analysts covering firms in the Brazilian Stock Exchange cite terms related to intangible assets in their reports – which, in turn, points to the relevance of these assets during the company valuation process – the difficulty of conducting evaluations grounded on reliable bases, the scarcity of quality information about their development, and incentive problems may challenge or even prevent quantitative assessments targeted at capital market participants.

We examine whether there are more information based trading activities that are generated around the time of earnings announcements. We distinguish between the influence of information based traders, especially short sellers, and market information quality through the reaction of participants to new information derived from corporate earnings announcements. We find that informed traders do take advantage of overpriced stocks, and do short stocks before the confirmation of past expectations of future cash flows from corporates. We apply Standardized Unexpected Earnings (SUE) in the method and our result indicates that informed traders are more likely to take advantage of overpriced stocks, using a tool (shorting) that is not traditionally used by unsophisticated investors. We also demonstrate an unique finding that informed traders follow stock analysts not for investing advice, but to take advantage of those unsophisticated investors that buy in to the rhetoric expressed by financial analysts.

In fact, numerous studies suggest a positive association between conservatism and corporate governance qual- ity [5] [6]. Consequently, the presence of a positive relation between analyst activities and accounting conser- vatism implies that analysts play an important role in financial reporting [7]. Our analysis should add new in- sights to the ongoing debate on the role played by financial analysts in capital markets. More precisely, we focus on analysts’ corporate governance role. Analysts are known to use extensive accounting information to provide earnings forecasts. They are also supposed to be one of the most sophisticated users of firm’s accounting infor- mation [8] [9]. Hence, analysts can monitor the management by scrutinizing financial statements and raising questions when they interact with firm’s managers. This monitoring role may reduce managers’ incentives to manipulate accounting numbers [7] [10].

Second, analyst following increases the quality of earnings. Financial analysts are acknowledged as external monitors in Jensen and Meckling (1976) and Healy and Palepu (2001). Prior research finds that this monitoring role of analysts increases the value of a firm (Chung and Jo 1996). Yu (2008) argues that financial analysts can be effective in detecting and deterring earnings management due to their advanced training in accounting and finance and industry knowledge. Consistent with this, he finds that more analysts lead less earnings management. Similar findings are documented in Ahn (2006) using the Korean data. Thus, earnings of a firm with analyst following are likely to have less opportunistic bias and better reflect a firm’s underlying economics. Prior research finds stronger market reactions to earnings with less opportunistic bias and less non -opportunistic error in es timating accrual (Francis et al. 2007; Lang et al. 2006). In summary, we expect earnings with analyst following to have a higher market reaction than those without analyst following as the consequence of analysts’ role as information intermediaries and external monitors. We formally state the first hypothesis as follows:

impossible to exactly reconstruct their decision making process. However, signals of analysts’ decision making may be obtained by analyzing earnings calls—quarterly live conference calls in which company executives present prepared re- marks (the presentation section) and then selected financial analysts ask questions (the question- answer section). Previous work has shown that earnings calls disclose more information than company filings alone (Frankel et al., 1999) and influence investor sentiment in the short term (Bowen et al., 2002). However, recently com- pany executives and investors have questioned their value (Koller and Darr, 2017; Melloy, 2018). Earnings calls are extremely complex, naturally-occurring examples of discourse that are interesting to study from the perspective of computational linguistics (see Figure 1). In this work, we examine analysts’ decision making in the context of earnings calls in two ways:

This table reports the results of the likelihood of Swedish analysts dropping firms in the post- RPA period, compared to non-Swedish analysts, which is conducted in a logistic model with the one-year-ahead forecasts provided by each analyst for each firm in the pre-RPA period. The dependent variable is an indicator variable – DIS, and equals to one when the analyst-firm pairs appear in the pre-RPA period but disappear in the post-RPA period, and zero otherwise. FORERR is the dependent variable, which is defined as analyst forecast error and calculated by taking the absolute value of the difference between the one-year-ahead EPS forecast and the actual EPS, scaled by the stock price two days before the forecast is provided, then multiplied by 100. SW is the indicator variable for the treatment group, equals to one for Swedish analysts, and zero for non-Swedish analysts. RPA is the indicator variable, equals to one when the observation is from post-RPA period (1 January 2015 onwards), and zero otherwise. MV represents the market value of equity in the logarithm form. AF is the total number of analysts following a firm within each quarter. INTA indicates the percentage of intangible assets scaled by total assets. MB is the market-to-book ratio and measured by dividing the market value of equity by the book value of equity. RETVOL is the stock return volatility within each quarter. LOSS is a dummy variable, and equals to one when the actual EPS is negative, and zero otherwise. DECL is a dummy variable, and equals to one when the current actual EPS is less than the EPS in the previous year. FEXP is the analyst’s experience to a specific firm in the logarithm form. Analyst’s experience to a specific firm is measured as the number of years since the analyst provides her first analyst’s opinion on the specific firm to present. GEXP is analysts’ general experience of being an analyst in the logarithm form. Analysts’ general experience is measured as the number of years from when the analyst issued her first analyst’s opinion for any firms to present. NUMCOV and NUMIND are total numbers of firms and industries that one analyst covers within each quarter respectively. Panel (B) reports Pearson (below diagonal) and Spearman (above diagonal) correlations. The correlations significant at the five percent level are shown in bold. Panel (C) outlines the results. All the regressions are clustered at the analyst level. Robust standard errors are reported in parentheses. *, **, and *** indicate significance at the 10%, 5% and 1% level respectively.

In the Egyptian context financial analysts’ forecasts are generally regarded as an unimportant earnings target. This is contrary to the findings of Abarbanell & Lehavy (2003); Bange & De Bondt (1998), Brown (2001), Brown and Caylor (2005); Caylor (2010); Dechow et al. (2003); Dhaliwal et al. (2004); Graham et al. (2005), Matsumoto (2002); and Payne & Robb (2000), Perry & Grinaker (1994), and Roychowdhury (2006), whose studies were conducted in developed countries. The results suggested two reasons for the unimportance of analysts' forecasts. First, these forecasts are considered inaccurate estimations of earnings and are seen as being unable to reflect the real situation of the firm. This is due not only to the fact that in Egypt it is difficult for analysts to get permission to visit firms so as to collect live data, but also to the common belief among firms that these earnings expectations are set in a way that serves analysts' own interests. The second reason is the scant concern given by investors to such expectations while making investment decisions.

Table 7 presents the regression results for model (1). As we include either Log(MCAP), COVERAGE, or the index dummies as control variables in the model, we report the results of three different speci- fication of this model, i.e. (1a)-(1c). To control effec- tively for the panel data structure of our sample, we report standard errors clustered by firm in the table (Petersen 2007). Consistent with hypothesis 1, in all three models the accounting principles dummies (IFRS and US) are positively and significantly (at least at the 1% level for US GAAP and at least at the 5% level for IAS/IFRS) related to forecast accuracy. These findings suggest that the forecast accuracy of financial analysts varies across accounting princi- ples. Assuming that financial analysts have incen- tives to provide accurate forecasts the accuracy seems to be higher for IFRS and US GAAP based observations than for German GAAP-based obser- vations which served as a reference group in the analysis. Our results are similar to those from Ashbaugh and Pincus (2001). However, contrary to the findings of Daske (2005) we provide evidence of higher forecast accuracy for IAAP in Germany. These differences might be due to the use of differ- ent samples and/or methodologies.

In a setting where the primary financial statements have been converted from individual financial statements to consolidated financial statements in Korea, we examine the effect of segment information disclosed by the firm on analysts’ consolidated-base earnings forecast accuracy. Since Korean firms have prepared the primary financial statements on a non-consolidated basis in the pre-IFRS regime, the adoption of International Financial Reporting Standards (IFRS) leads to a great deal of difficulties and complexities in making accurate consolidated forecasts for users of financial statements, even for financial analysts who are sophisticated users of financial statements. In this situation, we conjecture that the amount of details and types of information in segment disclosure will influence analysts’ forecast accuracy. Consistent with the prediction, we find that financial analysts are able to make more accurate earnings projections when firms provide more disaggregated accounting figures by each segment. Moreover, we find that analysts can make forecasts more accurately when firms disclose more persistent earnings component (i.e., segment operating income). Furthermore, we find that the effect of the segment disclosure levels on analysts’ forecast accuracy is more pronounced for firms with multi-segments. Our results indicate that disaggregated segment information is a useful source for financial analysts to have better understanding about complete picture of firms’ consolidated earnings and improve their forecasting performance.

The manager may increase the corporate profitability for reasons such as job security, bonuses, enhancing corporate value and other factors, in order to offer an optimum picture of company (Nasrollahi and Arefmanesh, 2010), in other words, when the sale growth decrease, manager is under pressure to report the profitability according to financial analysts prediction. This pressure causes an increase in accruals which is associated with the increase in inventories and receivables. With the reduction in sale, the earnings growth will reduce, hence the management wants to preserve the earnings growth, begin to manipulate the profitability which in turn detracts the quality of earning (Xie, 2001). As a result, accruals will increase and the distance between the operational earnings and cash flow from operations will enhance, moreover the reported earning has poor quality in economic decisions. Indeed, the accordance between the quality of earnings and cash flow demonstrate the quality of accruals and so this reduction in accordance and quality leads to an increase in the risk of corporate information (Francis et al., 2005). Consequently, it can be noted that the quality of earning is considered as a criteria for measuring the manager performance and results which demonstrate the management future. Quality of earning is part of accounting earning that depends on manager’s wisdom and performance (Bollo and Talbi, 2010). Process management is effective use of human and material resources in planning, organizing, mobilizing resources, guidance and a control system which is executed based on the value system to achieve organizational goals. With the significant advances in science, the behavioral sciences are fundamentally

reduce the predictive ability of earnings. Whether earnings management is done for the purpose of informativeness or opportunistic reasons, the quality of reported earnings is compromised. Financial analysts are trained professionals with knowledge on financial matters and are expected to use various resources in coming up with their forecasts. The analysts are therefore expected to see through earnings number. In other words, they are expected to be able to detect earnings management and incorporate this in their forecasts. However, prior research indicates that this is not the case. For example, Wang et al. (2015) show that analysts forecast is influenced by forecasts made by the management. Kim et al. (2015) provide evidence that analysts rely on information provided by companies in forming their forecasts. Ayres et al. (2017) show that the use of alternative accounting method does affect the accuracy of analyst forecasts. These findings lead us to conclude that analysts’ ability to detect earnings management is somehow limited. Hence we hypothesize that given earnings are managed to meet the analysts’ forecast, the forecast accuracy is higher given higher earnings management. In other words, the relationship between earnings management and forecast accuracy is positive in nature and can be stated as follows:

In order to measure the level of internet financial reporting of Turkish companies, an index of 50 financial-nonfinancial items is developed, which incorporates content and presentation criteria. A sample of 100 companies corporate web pages are screened in May 2010 for this purpose. The expectation of financial statement users is measured by an online survey. In the survey, investors are asked to choose the most important 15 items (from the index) they think companies should disclose or present on their web pages. The survey included financial analysts since they are the main users of financial information and the most appropriate subjects to employ as representatives of the financial information users. Our findings indicate that an expectation gap exists; investors have higher expectations for various facets than what companies actually report in the following areas: reports of analysts, phone number to investor relations, segmental reporting, financial data in processable format, and summary of financial data.

manager in a business firm. He performs such varied tasks as budgeting, financial forecasting, cash management, credit administration, investment analysis and funds procurement. The recent trend towards globalization of business activity has created new demands and opportunities in managerial finance. Financial statements are prepared and presented for the external users of accounting information. As these statements are used by investors and financial analysts to examine the firm’s performance in order to make investment decisions, they should be prepared very carefully and contain as much investment decisions; they should be prepared very carefully and contain as much information as possible. Preparation of the financial statement is the responsibility of top management. The financial statements are generally prepared from the accounting records maintained by the firm.