The Effect of Analyst Earnings and Supplementary Revenue and Cash Flow Forecasts on Accruals Mispricing

• In Event: Financial Accounting and Reporting V

Abstract

This paper investigates whether analyst earnings and supplementary revenue and cash flow forecasts influence accruals mispricing. Using an U.S. sample consisting of 19,950 firm-year observations across 1996 to 2010, we find that accruals mispricing is more severe for firms with only earnings forecasts and less severe for firms with supplementary forecasts in addition to earnings forecasts than firms without analyst coverage, after controlling for several factors of accruals mispricing. We continue to find consistent results when we use difference measures of accruals, control for endogeneity issue, and conduct various sensitivity tests. Furthermore, we show that accruals mispricing and the effect of analyst earnings and supplementary forecasts on accruals mispricing vary with a firm’s growth potentials, firm age, and financial conditions. Overall, these evidences suggest that analyst earnings and supplementary forecasts affect investors’ attention toward earnings and earnings components, the interpretation of earnings as evaluation input, the ability to predict accruals persistence, and the perceived importance of earnings in firm valuation, which in turn influences investor earnings fixation and thus accruals mispricing.

Authors

• Ting-Chiao Huang, National Cheng Kung University

• Yenn-Ru Chen, National Cheng Kung University

• Jeng-Ren Chiou, National Cheng Kung University