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Benchmark for Earnings Performance: Management Forecasts versus Analysts’ Forecasts

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  • Sandip Dhole

    ()
    (ISB, Hyderabad)

  • Sagarika Mishra

    ()
    (Deakin University)

  • K. Sivaramakrishnan

    ()

Abstract

We investigate the incremental information conveyed by management forecast errors over and above the consensus analyst forecast error at the time of earnings announcement. To the extent that analysts rationally revise their forecasts to subsume information contained in management releases, it is reasonable to argue that management forecasts are “dated” and that the revised analysts’ forecasts would constitute the more timely benchmark to evaluate performance. We find that when management forecasts and the subsequent analyst forecasts are different, management forecast errors convey information to the stock market that is not reflected in the consensus analyst forecast errors.

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File URL: http://www.deakin.edu.au/buslaw/aef/workingpapers/fin-econometrics/2012_06.pdf
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Bibliographic Info

Paper provided by Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance in its series Financial Econometics Series with number 2012_06.

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Length: 52
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Handle: RePEc:dkn:ecomet:fe_2012_06

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Related research

Keywords: Management forecasts; Analysts’ forecasts; Earnings Response Coefficient;

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References

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  1. Niamh Brennan, 1999. "Voluntary Disclosure of Profit Forecasts by Target Companies in Takeover Bids," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 26(7&8), pages 883-917.
  2. Collins, Daniel W. & Kothari, S. P., 1989. "An analysis of intertemporal and cross-sectional determinants of earnings response coefficients," Journal of Accounting and Economics, Elsevier, vol. 11(2-3), pages 143-181, July.
  3. Givoly, Dan & Lakonishok, Josef, 1979. "The information content of financial analysts' forecasts of earnings: Some evidence on semi-strong inefficiency," Journal of Accounting and Economics, Elsevier, vol. 1(3), pages 165-185, December.
  4. Baik, Bok & Jiang, Guohua, 2006. "The use of management forecasts to dampen analysts' expectations," Journal of Accounting and Public Policy, Elsevier, vol. 25(5), pages 531-553.
  5. Bartov, Eli & Givoly, Dan & Hayn, Carla, 2002. "The rewards to meeting or beating earnings expectations," Journal of Accounting and Economics, Elsevier, vol. 33(2), pages 173-204, June.
  6. Stephen P. Baginski & John M. Hassell & Michael D. Kimbrough, 2004. "Why Do Managers Explain Their Earnings Forecasts?," Journal of Accounting Research, Wiley Blackwell, vol. 42(1), pages 1-29, 03.
  7. Brown, Lawrence D., 1991. "Forecast selection when all forecasts are not equally recent," International Journal of Forecasting, Elsevier, vol. 7(3), pages 349-356, November.
  8. Baginski, Stephen P & Hassell, John M & Hillison, William A, 2000. " Voluntary Causal Disclosures: Tendencies and Capital Market Reaction," Review of Quantitative Finance and Accounting, Springer, vol. 15(4), pages 371-89, December.
  9. Diamond, Douglas W & Verrecchia, Robert E, 1991. " Disclosure, Liquidity, and the Cost of Capital," Journal of Finance, American Finance Association, vol. 46(4), pages 1325-59, September.
  10. Kormendi, Roger & Lipe, Robert, 1987. "Earnings Innovations, Earnings Persistence, and Stock Returns," The Journal of Business, University of Chicago Press, vol. 60(3), pages 323-45, July.
  11. Lys, Thomas & Sohn, Sungkyu, 1990. "The association between revisions of financial analysts' earnings forecasts and security-price changes," Journal of Accounting and Economics, Elsevier, vol. 13(4), pages 341-363, December.
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