Are analysts recommendations associated with management's earnings forecasts? / Vahid Biglari
The opportunistic and efficiency views of the forecasts undertaken by managers are completely different. In the efficiency approach, it is believed that by providing accurate forecasts, management provides correct information to the market, thereby restricting them to do earnings management. Ther...
Saved in:
| Main Author: | |
|---|---|
| Format: | Thesis |
| Published: |
2014
|
| Subjects: | |
| Online Access: | http://studentsrepo.um.edu.my/4600/1/Thesis_Vahid_Biglari_CHA09919_For_Final_Submission_10082014___4.pdf http://studentsrepo.um.edu.my/4600/ |
| Tags: |
Add Tag
No Tags, Be the first to tag this record!
|
| Summary: | The opportunistic and efficiency views of the forecasts undertaken by managers are
completely different. In the efficiency approach, it is believed that by providing accurate
forecasts, management provides correct information to the market, thereby restricting them
to do earnings management. Therefore forecasts are truthful. In contrast, the opportunistic
view of forecasts is that management s forecasts consist of biased signals. Managers will
use earnings and Forecasts Management (FM) as tools to create positive earnings surprises
that will lead to temporary stock price appreciation or preventing stock price depreciation.
This research shows that as indicated by the companies growth capabilities the Analysts
Recommendations (AR) can explain the difference in behaviours of managers under these
two views. This research highlights the managers decision in reporting pessimistic forecast
to produce positive Forecasts Errors (FEs) when a company s shares are recommended to
sell (hereafter called sell companies), and generate optimistic forecast when a company s
shares are recommended to buy (hereafter called buy companies).
Previous researches show that buy (growth) companies conduct income increasing earnings
management in order to meet forecasts and generate positive forecast Errors (FEs). This
behavior however, is not inherent in sell (non-growth) companies. By referring to the
existing framework in the literature, this research hypothesizes that since sell companies are
pressured to avoid income increasing earnings management, they are more capable and
inclined to pursue income decreasing FM in order to produce positive FEs.
IV
Using a sample of 2576 firm- years of companies that are listed on the NYSE on
years 2009 and 2010, the study discovers that sell companies conduct income decreasing
FM to produce positive FE. However, the frequency of positive FEs of sell companies is
not higher than that of buy companies. In addition, in the sell companies group, the
companies that have positive forecasts errors issue higher pessimistic forecasts. Such
pessimistic forecasts lead to higher positive forecasts errors. However, in the buy
companies group, the companies that have positive forecasts errors do not issue higher
pessimistic forecasts. Such pessimistic forecasts do not lead to higher positive forecasts
errors. Consistent with the efficiency perspective, the study suggests that even though buy
and sell companies are highly motivated to avoid negative FEs, they exploit different but
efficient strategies in order to meet their respective forecasts.
The findings of this research adds to the previous researches by proving that not only the
buy companies (which are supposed to be growth companies) engage in income increasing
earnings management to realize positive forecast error, but sell (non-growth) companies
engage in negative forecast management to accomplish similar goals. Furthermore, the
findings help us understand the complexities behind informative and opportunistic forecasts
that fit under efficiency versus opportunistic theories in the literature. |
|---|