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Discontinued operations and analyst forecast accuracy

Author

Listed:
  • Brooke Beyer

    (Kansas State University)

  • Binod Guragai

    (Texas State University)

  • Eric T. Rapley

    (Colorado State University)

Abstract

The Financial Accounting Standards Board requires separate reporting of discontinued operations within the income statement to provide better information about companies’ future earnings for financial statement users. However, discontinued operations can increase the complexity of forecasting earnings because a portion of permanent earnings is being eliminated, the future effect on continuing operations may be unclear, and there are incentives for opportunistic reporting. Additionally, anecdotal evidence also shows that analysts, an important proxy for financial statement users, have difficulty in adjusting their forecasts when companies report discontinued operations. This study empirically examines whether reporting of discontinued operations affects analyst earnings forecast accuracy. Our results suggest that forecast accuracy initially declines following the reporting of discontinued operations, and the effect is more pronounced for firms with lower quality discontinued operations disclosures. Results also show the initial decline in forecast accuracy dissipates after a year and is concentrated in firms with potentially more opportunistic reporting within discontinued operations.

Suggested Citation

  • Brooke Beyer & Binod Guragai & Eric T. Rapley, 2021. "Discontinued operations and analyst forecast accuracy," Review of Quantitative Finance and Accounting, Springer, vol. 57(2), pages 595-627, August.
    • Handle: RePEc:kap:rqfnac:v:57:y:2021:i:2:d:10.1007_s11156-021-00956-7
    DOI: 10.1007/s11156-021-00956-7
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    More about this item

    Keywords

    Discontinued operations; Forecast accuracy; Disclosure quality; Classification shifting; Task complexity;
    All these keywords.

    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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