IDEAS home Printed from https://ideas.repec.org/a/bla/acctfi/v60y2020i4p4225-4255.html
   My bibliography  Save this article

How efficient is the market for Australian firms’ earnings information?

Author

Listed:
  • Stephen Taylor
  • Alex Tong

Abstract

We construct a measure of the speed with which forecasts issued by sell‐side analysts accurately forecast future annual earnings. Following Marshall, we label this measure earnings information flow timeliness (EIFT). This measure avoids the aggregation problem inherent in price‐based measures of information efficiency. We document large variation in EIFT across firm‐years, and show that EIFT is positively associated with the extent of analyst following, consistent with increased analyst coverage improving the speed with which earnings‐related information is recognised. We also find that EIFT is higher for firm‐years classified as ‘bad news’ (i.e., where analysts’ forecasts at the start of the financial period exceed the reported outcome). However, when we separately consider instances where analysts appear to forecast non‐GAAP (or ‘street’) earnings rather than GAAP earnings, we find that the greater timeliness of bad news is concentrated among observations where analysts forecast non‐GAAP earnings, where unusual items are typically excluded. We conclude that the market for accounting information is more efficient for negative operating outcomes than for negative outcomes reflecting unusual items.

Suggested Citation

  • Stephen Taylor & Alex Tong, 2020. "How efficient is the market for Australian firms’ earnings information?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(4), pages 4225-4255, December.
    • Handle: RePEc:bla:acctfi:v:60:y:2020:i:4:p:4225-4255
    DOI: 10.1111/acfi.12524
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/acfi.12524
    Download Restriction: no
    File URL: https://libkey.io/10.1111/acfi.12524?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Skinner, Dj, 1994. "Why Firms Voluntarily Disclose Bad-News," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 32(1), pages 38-60.
    2. Joos, Peter & Piotroski, Joseph D. & Srinivasan, Suraj, 2016. "Can analysts assess fundamental risk and valuation uncertainty? An empirical analysis of scenario-based value estimates," Journal of Financial Economics, Elsevier, vol. 121(3), pages 645-663.
    3. Brian J. Bushee & John E. Core & Wayne Guay & Sophia J.W. Hamm, 2010. "The Role of the Business Press as an Information Intermediary," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 48(1), pages 1-19, March.
    4. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    5. Ball, R & Brown, P, 1968. "Empirical Evaluation Of Accounting Income Numbers," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 6(2), pages 159-178.
    6. Clement, Michael B., 1999. "Analyst forecast accuracy: Do ability, resources, and portfolio complexity matter?," Journal of Accounting and Economics, Elsevier, vol. 27(3), pages 285-303, July.
    7. Blankespoor, Elizabeth & Miller, Gregory S. & White, Hal D., 2013. "The Role of Dissemination in Market Liquidity: Evidence from Firms' Use of Twitter," Research Papers 2106r, Stanford University, Graduate School of Business.
    8. S. P. Kothari & Susan Shu & Peter D. Wysocki, 2009. "Do Managers Withhold Bad News?," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 47(1), pages 241-276, March.
    9. Verrecchia, Robert E., 1983. "Discretionary disclosure," Journal of Accounting and Economics, Elsevier, vol. 5(1), pages 179-194, April.
    10. Horton, Joanne & Serafeim, George & Wu, Shan, 2017. "Career concerns of banking analysts," Journal of Accounting and Economics, Elsevier, vol. 63(2), pages 231-252.
    11. Wendy Beekes & Philip Brown, 2006. "Do Better‐Governed Australian Firms Make More Informative Disclosures?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(3‐4), pages 422-450, April.
    12. Mark Bagnoli & William Kross & Susan G. Watts, 2002. "The Information in Management’s Expected Earnings Report Date: A Day Late, a Penny Short," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 40(5), pages 1275-1296, December.
    13. Wendy Beekes & Philip Brown, 2006. "Do Better-Governed Australian Firms Make More Informative Disclosures?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(3-4), pages 422-450.
    14. Beaver, Wh, 1968. "Information Content Of Annual Earnings Announcements," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 6, pages 67-92.
    15. Pervin K. Shroff & Ramgopal Venkataraman & Baohua Xin, 2014. "Timeliness of Analysts' Forecasts: The Information Content of Delayed Forecasts," Contemporary Accounting Research, John Wiley & Sons, vol. 31(1), pages 202-229, March.
    16. Zoltan Matolcsy & Anne Wyatt, 2006. "Capitalized intangibles and financial analysts," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 46(3), pages 457-479, September.
    17. 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.
    18. Michael S. Drake & Darren T. Roulstone & Jacob R. Thornock, 2012. "Investor Information Demand: Evidence from Google Searches Around Earnings Announcements," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 50(4), pages 1001-1040, September.
    19. Bradshaw, Mark T. & Christensen, Theodore E. & Gee, Kurt H. & Whipple, Benjamin C., 2018. "Analysts’ GAAP earnings forecasts and their implications for accounting research," Journal of Accounting and Economics, Elsevier, vol. 66(1), pages 46-66.
    20. Ron Kasznik & Maureen F. McNichols, 2002. "Does Meeting Earnings Expectations Matter? Evidence from Analyst Forecast Revisions and Share Prices," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 40(3), pages 727-759, June.
    21. Andrew B. Jackson & Gerry Gallery & Maria C. A. Balatbat & Steven Cahan, 2015. "The impact of litigation risk on the strategic timing of management earnings forecasts," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 55(2), pages 467-495, June.
    22. Kenneth Merkley & Roni Michaely & Joseph Pacelli, 2017. "Does the Scope of the Sell-Side Analyst Industry Matter? An Examination of Bias, Accuracy, and Information Content of Analyst Reports," Journal of Finance, American Finance Association, vol. 72(3), pages 1285-1334, June.
    23. Wendy Beekes & Philip Brown & Wenwen Zhan & Qiyu Zhang, 2016. "Corporate Governance, Companies’ Disclosure Practices and Market Transparency: A Cross Country Study," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 43(3-4), pages 263-297, March.
    24. Mariela Carvajal & Jeffrey J. Coulton & Andrew B. Jackson & Tom Smith, 2017. "Earnings benchmark hierarchy," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 57(1), pages 87-111, March.
    25. Yu, Fang (Frank), 2008. "Analyst coverage and earnings management," Journal of Financial Economics, Elsevier, vol. 88(2), pages 245-271, May.
    26. Ray Ball & Lakshmanan Shivakumar, 2008. "How Much New Information Is There in Earnings?," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 46(5), pages 975-1016, December.
    27. Grace Chia‐Man Hsu, 2009. "Impact of earnings performance on price‐sensitive disclosures under the Australian continuous disclosure regime," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 49(2), pages 317-339, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Leonardo Fernandez, 2012. "Price Discovery, Investor Distraction and Analyst Recommendations Under Continuous Disclosure Requirements in Australia," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2012, January-A.
    2. Leonardo Fernandez, 2012. "Price Discovery, Investor Distraction and Analyst Recommendations Under Continuous Disclosure Requirements in Australia," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 3, July-Dece.
    3. Beyer, Anne & Cohen, Daniel A. & Lys, Thomas Z. & Walther, Beverly R., 2010. "The financial reporting environment: Review of the recent literature," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 296-343, December.
    4. Blankespoor, Elizabeth & deHaan, Ed & Marinovic, Iván, 2020. "Disclosure processing costs, investors’ information choice, and equity market outcomes: A review," Journal of Accounting and Economics, Elsevier, vol. 70(2).
    5. Fargher, Neil & Wee, Marvin, 2019. "The impact of Ball and Brown (1968) on generations of research," Pacific-Basin Finance Journal, Elsevier, vol. 54(C), pages 55-72.
    6. Stephen Taylor & Alex Tong, 2023. "How important are semi‐annual earnings announcements? An information event perspective," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(3), pages 3585-3607, September.
    7. Robert M. Bushman & Abbie J. Smith & Regina Wittenberg‐Moerman, 2010. "Price Discovery and Dissemination of Private Information by Loan Syndicate Participants," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 48(5), pages 921-972, December.
    8. Zhang, Xiaoxiang & Zhang, Qiyu & Chen, Ding & Gu, Jun, 2019. "Financial integration, investor protection and imbalanced optimistically biased information timeliness in emerging markets," International Review of Financial Analysis, Elsevier, vol. 64(C), pages 38-56.
    9. S. P. Kothari & Charles Wasley, 2019. "Commemorating the 50‐Year Anniversary of Ball and Brown (1968): The Evolution of Capital Market Research over the Past 50 Years," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 57(5), pages 1117-1159, December.
    10. Zhang, Qiyu & Ding, Rong & Chen, Ding & Zhang, Xiaoxiang, 2023. "The effects of mandatory ESG disclosure on price discovery efficiency around the world," International Review of Financial Analysis, Elsevier, vol. 89(C).
    11. Reyes, Tomas & Batista, Julian A. & Chacon, Alvaro & Martinez, Diego & Kausel, Edgar E., 2023. "Attention-driven reaction to extreme earnings surprises," The Quarterly Review of Economics and Finance, Elsevier, vol. 92(C), pages 230-248.
    12. Schoenfeld, Jordan, 2017. "The effect of voluntary disclosure on stock liquidity: New evidence from index funds," Journal of Accounting and Economics, Elsevier, vol. 63(1), pages 51-74.
    13. Sung Hwan Jung, 2017. "The contingent effect of analyst coverage: how does analyst coverage affect innovation and Tobin’s Q?," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 24(1-2), pages 43-67, April.
    14. Jeffrey J. Coulton & Tami Dinh & Andrew B. Jackson & Tom Smith, 2016. "The impact of sentiment on price discovery," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 56(3), pages 669-694, September.
    15. Truong, Cameron & Corrado, Charles & Chen, Yangyang, 2012. "The options market response to accounting earnings announcements," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(3), pages 423-450.
    16. Amal Aouadi & Sylvain Marsat, 2018. "Do ESG Controversies Matter for Firm Value? Evidence from International Data," Journal of Business Ethics, Springer, vol. 151(4), pages 1027-1047, September.
    17. Kothari, S. P., 2001. "Capital markets research in accounting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 105-231, September.
    18. Haß, Lars Helge & Vergauwe, Skrålan & Zhang, Qiyu, 2014. "Corporate governance and the information environment: Evidence from Chinese stock markets," International Review of Financial Analysis, Elsevier, vol. 36(C), pages 106-119.
    19. Yangyang Chen & C. S. Agnes Cheng & Shuo Li & Jingran Zhao, 2021. "The monitoring role of the media: Evidence from earnings management," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(3-4), pages 533-563, March.
    20. Zhang, Qiyu & Zhang, Xiaoxiang & Chen, Ding & Strange, Roger, 2022. "Market discipline or rent extraction: Impacts of share trading by foreign institutional investors in different corporate governance and investor protection environments," International Review of Financial Analysis, Elsevier, vol. 79(C).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:acctfi:v:60:y:2020:i:4:p:4225-4255. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/aaanzea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.