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The Effect Of Accruals On Security Analysts’ Target Price Forecast Performance

Listed author(s):
  • Cho JOONG-SEOK
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    Using a sample of U.S. security analysts’ target price forecasts issued over the period 2000-2010, we examine how accounting accruals and accrual components affect security analysts’ target price forecast performance. In this study, we find that analysts’ target price forecasts for firms with higher accruals level are less accurate and have lower possibilities of being met or beat at some time during or at the end of the forecast horizon. With the deposition of accruals into short- and long-term accruals, our results show that both types of accruals lower the possibility of achieving analysts’ target prices at the end of the forecast horizon. However, only short-term accruals affect negatively the possibility of achieving analysts’ target prices at some time during the forecast horizon. These results suggest that the analysts fail to incorporate correctly the implications of the accrual information.

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    File URL: http://www.jaes.reprograph.ro/articles/Fall2012/articles/JoongSeok_C.pdf
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    Article provided by Spiru Haret University, Faculty of Financial Management and Accounting Craiova in its journal Journal of Applied Economic Sciences.

    Volume (Year): 7 (2012)
    Issue (Month): 3(21)/ Fall 2012 ()
    Pages: 228-234

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    Handle: RePEc:ush:jaessh:v:7:y:2012:i:3(21)_fall2012:p:228
    Contact details of provider: Web page: http://www2.spiruharet.ro/facultati/facultate.php?id=14

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    1. Bandyopadhyay, Sati P. & Brown, Lawrence D. & Richardson, Gordon D., 1995. "Analysts' use of earnings forecasts in predicting stock returns: Forecast horizon effects," International Journal of Forecasting, Elsevier, vol. 11(3), pages 429-445, September.
    2. Ou, Jane A. & Penman, Stephen H., 1989. "Financial statement analysis and the prediction of stock returns," Journal of Accounting and Economics, Elsevier, vol. 11(4), pages 295-329, November.
    3. Stober, Thomas L., 1992. "Summary financial statement measures and analysts' forecasts of earnings," Journal of Accounting and Economics, Elsevier, vol. 15(2-3), pages 347-372, August.
    4. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
    5. Dechow, Patricia M., 1994. "Accounting earnings and cash flows as measures of firm performance : The role of accounting accruals," Journal of Accounting and Economics, Elsevier, vol. 18(1), pages 3-42, July.
    6. Narasimhan Jegadeesh & Joonghyuk Kim & Susan D. Krische & Charles M. C. Lee, 2004. "Analyzing the Analysts: When Do Recommendations Add Value?," Journal of Finance, American Finance Association, vol. 59(3), pages 1083-1124, 06.
    7. Dechow, Patricia M. & Kothari, S. P. & L. Watts, Ross, 1998. "The relation between earnings and cash flows," Journal of Accounting and Economics, Elsevier, vol. 25(2), pages 133-168, May.
    8. Asquith, Paul & Mikhail, Michael B. & Au, Andrea S., 2005. "Information content of equity analyst reports," Journal of Financial Economics, Elsevier, vol. 75(2), pages 245-282, February.
    9. Mark T. Bradshaw & Scott A. Richardson & Richard G. Sloan, 2001. "Do Analysts and Auditors Use Information in Accruals?," Journal of Accounting Research, Wiley Blackwell, vol. 39(1), pages 45-74, 06.
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