analysts interim earnings forecasts evidence on the forecasting process existing empirical evidence indicates that analyst forecasts of corporate earnings do not meet the strict rationality standards prescribed by econometric tests of the rational expectations hypothesis 1 in this paper we address the question of whether the expectation formation process underlying analyst forecasts is adaptive or whether these forecasts are influenced by noninformational factors such as incentives arising from the market for their forecasts o brien 1988 lin and mcnichols 1993 francis and philbrick 1993 and dugar and nathan 1992 and interaction between judgmental and or statistical forecasting methods bunn and wright 1991 fan 1990 and hoerl and kennard 1970 the rejection of rational expectations gives rise to two views of the forecasting process of analysts the first based on an informational argument is that the forecasting process is adaptive marcet and sargent

analysts gaap earnings forecasts and their implications for accounting research abstract we use newly available gaap forecasts to document that traditionally identified gaap forecast errors contain 37 measurement error correcting for this measurement error we settle a long standing debate regarding investor preference for gaap versus non gaap earnings and provide strong evidence of a preference for non gaap earnings we also revisit the use of non gaap exclusions to meet analysts forecasts when gaap earnings fall short results indicate that 34 of these traditionally identified meet or beat firms are misidentified due to measurement error and this error masks evidence that firms more frequently exclude transitory rather than recurring expenses for meet or beat purposes

the information content of annual earnings releases a trading volume approach this paper reports the results of an empirical examination of the relations between the volume of securities traded the magnitude of surprises in annual earnings announcements and firm size although early trading volume studies e g beaver 1968 kiger 1972 and foster 1973 replicated basic information content studies with findings similar to those based on security prices we should not expect that security price and trading volume research will continue to yield identical results when more refined hypotheses are tested trading volume reflects investors activity by summing all market trades whereas security prices reflect an aggregation or averaging of investors beliefs as a result we will on occasion observe differences between price and volume reactions to earnings announcements as did morse 1981 this study extends the recent trend toward tests of more refined hypotheses by using a larger sample to examine the associations between unexpected earnings firm size and trading volume and testing whether such associations can be generalized across fiscal year end dates and stock exchange listing my results show a continuous positive relationship between trading

analysts forecasts as proxies for investor beliefs in empirical research abstract we analyze how analysts forecasts relate to investor beliefs and describe the implications of these relations for price and volume reactions to earnings surprises we show that dispersion among forecasts does not fully capture investor uncertainty we also show how the relations between market reactions and forecast properties differ under the alternative assumptions of exogenous and endogenous private information acquisition finally the analysis suggests refined tests for volume reactions at the time of an announcement our results indicate that the model is useful for understanding and interpreting empirical work and developing empirical tests of market reactions to announcements

the dilemmas of market socialism capital market reform in china part i bonds this two part article analyses the attempts to reform the socialist financial system in china by diversifying financial assets and introducing capital markets the approach used is that of political economy in the sense of elucidating the interplay between political and economic interests actors and issues in the reform process part i discusses the issue of bonds by governments and enterprises although the reform era has seen gradual progress towards something resembling a bond market in terms of a diversification of bond types and growing competition between bond issues there is no evidence that this has improved allocative efficiency in the economy rather bonds have functioned as one instrument in a complex struggle for resources between political institutional and economic actors in the context of a continuing shortage economy this competitive system falls far short of a true market rather it embodies powerful systemic factors reflecting the basic structural and institutional features o

firm valuation earnings expectations and the exchange rate exposure effect consistent with previous research we fail to find a significant correlation between the abnormal returns of our sample firms with international activities and changes in the dollar we investigate the possibility that this failure is due to mispricing lagged changes in the dollar are a significant variable in explaining current abnormal returns of our sample firms suggesting that mispricing does occur a simple trading strategy based upon these results generates significant abnormal returns corroborating evidence from returns around earnings announcements as well as errors in analysts forecasts of earnings is also provided it is a widely held view that exchange rate movement should affect the value of a firm standard economic analysis implies that the profitability and value of most u s firms with foreign sales or operations abroad should increase decrease with an unexpected depreciation appreciation of the dollar as expected foreign currency cash flows translate into larger smaller u s

security analyst superiority relative to univariate time series models in forecasting quarterly earnings abstract this paper provides evidence of security analyst sa superiority relative to univariate time series ts models in predicting firms quarterly earnings numbers and shows that sa forecast superiority in our sample is attributable to 1 better utilization of information existing on the date that ts model forecasts can be initiated a contemporaneous advantage and 2 use of information acquired between the date of initiation of ts model forecasts and the date when sa forecasts are published a timing advantage

rural urban disparity and sectoral labour allocation in china this study examines china s rural urban segmentation and its causes in the context of economic reforms household survey and aggregate data indicate a v shaped process in which rural urban consumption and income differentials decreased between 1978 and 1985 but then have continually increased to historically high levels this sectoral division is consistent with production function estimates based on provincial data that reveal higher labour productivity in urban state owned industries than in rural industries and agriculture to explain the v shaped change we argue that the precedent of successful rural reforms raised farmers relative earnings but the remaining obstacles to an efficient sectoral allocation of labour have prevented china from eliminating dualism recent financial policies consisting of urban price subsidies and increased investment credits have also had influential distribution effects that are biased against the rural sector

risk return and equilibrium a revisit this paper reports the results of tests of the major implications of the two parameter capital asset pricing model the findings indicate that the relationship between stock returns and systematic risk contains important nonlinearities during 1935 82 these nonlinearities cannot be ascribed to previously documented anomalies related to firm size or january seasonality moreover the test results appear to be sensitive to the choice of the proxy for the market portfolio

sensitivity of the bank stock returns distribution to changes in the level and volatility of interest rate a garch m model abstract the objective of this paper is to employ the generalized autoregressive conditionally heteroskedastic in the mean garch m methodology to investigate the effect of interest rate and its volatility on the bank stock return generation process this framework discards the restrictive assumptions of linearity independence and constant conditional variance in modeling bank stock returns the model presented here allows for shifts in the volatility equation in response to the changes in monetary policy regime in 1979 and 1982 to be estimated arch garch and volatility feed back effects are found to be significant interest rate and interest rate volatility are found to directly impact the first and the second moments of the bank stock returns distribution respectively the latter also affects the risk premia indirectly the degree of persistence in shocks is substantial for all the three bank portfolios and sensitive to the nature of the bank portfolio and the prevailing monetary policy regime

stagflationary effect of government bond financing in the transforming chinese economy a general equilibrium analysis abstract this paper studies how the method of government debt financing affects the macroeconomic performance of the transforming chinese economy the investigation is conducted within the context of an endogenous growth model that incorporates the major institutional features of the chinese economy using this framework we evaluate the effects on the growth rate of output and inflation if the chinese government relies more on bonds and less on money creation for budget deficit and debt repayment financing it is shown that although this policy change can reduce the growth rate of the money supply it can generate a stagflationary effect reducing the rate of output growth while raising the rate of inflation if the initial fraction of government deficit and debt repayment financed by bonds is sufficiently small and the tax rate on labor income is sufficiently low

bond and stock market response to unexpected earnings announcements this study examines whether earnings changes convey information in bond markets and finds a significant positive negative reaction to unexpected earnings increases decreases the results are consistent whether earnings announcements precede or follow dividend announcements thus earnings surprises convey information to bond markets and changes in firm value are split among bondholders and stockholders this is in contrast to evidence from studies examining unexpected dividend announcements where bond price reaction is asymmetric cross sectional analysis reveals that bond excess returns are positively related to earnings surprises i introduction stock market reaction to earnings announcements has received significant attention in the finance and accounting literature ball and brown 1968 brown 1978 watts 1978 aharony and swary 1980 and fried and givoly 1982 are some ofthe studies that observe a revision of stock prices associated with the release of earnings information lev 1989 provides a survey of research in this area the explanation for the above empirical findings is that unexpected earnings provide new information about future cash flows furthermore the classical discounted cash flow model predicts a revision in firm value that is the present value of expected future cash flows whether this increased firm value accrues to stockholders and bondholders is an empirical issue past research on the information content of earnings has focused solely on stock price behavior and finds at least part of the benefits accrue to stockholders in this study we examine the bond market reaction to unexpected quarterly earnings announcements the study is unique for several reasons first dividends repurchases and earnings are eonsidered primary mechanisms used by manage ment to convey information about future cash flows to securityholders recent

the robustness of risk return nonlinearities to the normality assumption in a recent study tinic and west 1986 empirically reexamine the risk return relationship posited by the traditional mean variance capm they find a positive nonlinear relationship between risk and return except during january when the market rewards bearing nonsystematic risk this study examines the hypothesis that nonnormality of re turn distributions may account for some of these anomalous results we compare shalit and yitzhaki s 1984 mean extended gini capm an equilibrium asset pricing relation that is independent of the form of the underlying asset distribution with the traditional capm our results indicate that the nonlinear risk return relationship and the size and january effects are robust to nonnormality of return distributions

automated earnings forecasts beat analysts or combine and conquer prior studies attribute analysts forecast superiority over time series forecasting models to their access to a large set of firm industry and macroeconomic information an information advantage which they use to update their forecasts on a daily weekly or monthly basis a timing advantage this study leverages recently developed mixed data sampling midas regression methods to synthesize a broad spectrum of high frequency data to construct forecasts of firm level earnings we compare the accuracy of these forecasts to those of analysts at short horizons of one quarter or less we find that our midas forecasts are more accurate and have forecast errors that are smaller than analysts when forecast dispersion is high and when the firm size is smaller in addition we find that combining our midas forecasts with analysts forecasts systematically outperforms analysts alone which indicates that our midas models provide information orthogonal to analysts our results provide preliminary support for th

misspecification of capital asset pricing this study documents empirical anomalies which suggest that either the simple one period capital asset pricing model capm is misspecified or that capital markets are inefficient in particular portfolios based on firm size or earnings price e p ratios experience average returns systematically different from those predicted by the capm furthermore the abnormal returns persist for at least two years this persistence reduces the likelihood that these results are being generated by a market inefficiency rather the evidence seems to indicate that the equilibrium pricing model is misspecified however the data also reveals that an e p effect does not emerge after returns are controlled for the firm size effect the firm size effect largely subsumes the e p effect thus while the e p anomaly and value anomaly exist when each variable is considered separately the two anomalies seem to be related to the same set of missing factors and these factors appear to be more closely associated with firm size than e p ratios

the association between accounting earnings and security returns for large and small firms abstract the differential information hypothesis advanced by atiase 1980 states that information production and dissemination by private parties for the purpose of identifying mispriced securities is an increasing function of firm size this study examines two corollaries of that hypothesis first security prices of large firms anticipate accounting earnings earlier than security prices of small firms second for a given level of unexpected earnings the cumulative abnormal returns of small firms exceed those of large firms the results are generally consistent with atiase s hypothesis

are multinational corporations safer the failure probabilities of a sample of multinational corporations mncs are derived and compared with those of a control group of domestic corporations dmcs the results suggest that the mean insolvency probability of dmcs is significantly higher than that of the mncs it is also observed that mncs are significantly more capitalized and the standard deviation of their equity as well as their average systematic risk are also significantly lower furthermore the average insolvency probability of the dmcs is more sensitive to changes in the values of the parameters than those of the mncs

risk return and equilibrium an extension this study extends a recent empirical reexamination of the risk ret urn relationship by examining the possibility that an omitted size re lationship may account for the anomalous results h levy s generaliz ed capital asset pricing model provides the theoretical basis for incorporating the impact of firm size on expected return by examining the relative importance of unsystematic risk in pricing closely held securities compared to pricing widely held securities in so doing the empirical analysis also provides a test of an implication of the generalized capital asset pricing model two methodologies are used t o test the hypotheses empirically the results indicate that even thou gh size has a significant impact on the risk return relationship it apparently does not account for the anomalous results this implicati on is consistent under both methodologies copyright 1988 by the university of chicago

firm size and the information content of prices with respect to earnings abstract beaver lambert and morse 1980 suggest that prices may be useful in forecasting future earnings we explore the information content of prices with respect to earnings by focusing on firm size and its relation to the predictive accuracy of price based earnings forecasts firm size proxies for the amount of information and for the number of traders and professional analysts processing the available information about an enterprise our empirical results are consistent with the hypothesis that price based earnings will outperform univariate time series forecasts by a greater margin for larger firms than for smaller firms

consensus forests of corporate earnings analysts forecasts and time series methods an alternative to using a single forecasting method is to average the forecasts made by various methods in this paper we examine empirically combinations of financial analysts forecasts and forecasts from time series methods in order to predict corporate earnings per share we conclude that on average the primary forecasting advantages of analysts over time series methods based on annual data appear to occur over short forecast horizons less than a year neither analysts nor other time series methods substantially outperform a random walk prediction of no change when forecasts are made near the beginning of the fiscal year for predictions in the first half of the fiscal year there is evidence of forecasting benefits from combining time series and analysts forecasts especially if there are few analysts forecasts

managers earnings forecasts and intra industry information transfers abstract the effect that voluntarily disclosed managers earnings forecasts have on the security prices of the announcing firms and other firms in the same industry is examined the results are consistent with information content in managers forecasts and with information transfer between forecast firms and other firms in the industry these inferences are drawn from firms abnormal returns computed from single and two index pricing models where the latter includes market and industry indexes interestingly while a positive information transfer is evident with market model residuals once industry cross sectional covariation in firms returns is removed no directional relation is apparent

the decomposition of disturbances to national output of china the evidence of sectoral and regional shocks the chinese government has established policies to promote its industrial sectors and to develop coastal provinces since the late 1978 to investigate the extent and reason the output growth in china has been influenced by these policies an error component model is employed to decompose the importance of sectoral and regional shocks to variations in national output the results show that both sectoral specific shocks common across regions and regional specific shocks common across sectors are important in explaining the disturbance of national output in china specifically sectoral specific shocks consistently explain relatively more disturbance of chinese output than regional specific shocks do our empirical results are somewhat different from stockman 1988 and costello 1993 since they show almost equal explanatory power of sectoral and national shocks in accounting for national outputs in oecd countries

a note on the effectiveness of security analysts forecasts abstract the purpose of this note is to examine the effectiveness of security analysts forecasts diversified sample of 159 firms with a 1980 1982 post sample estimation period the results of this study indicate the analysts forecasts produce statistically significant excess returns

intraindustry information transfers associated with management forecasts of earnings this study documents information transfers associated with the sign and magnitude of the changes in earnings expectations conveyed by management forecasts that is the management forecast of one firm discloser generates unexpected price reactions for firms nondisclosers similar to the forecaster the results are consistent with information transfers documented for releases of actual earnings foster 1981 and sales announcements olsen and dietrich 1985 1 these results build on prior management forecast research that has documented a link between the sign and magnitude of the changes in earnings expectations conveyed by management forecasts and the unexpected share returns price reactions of forecasting firms ajinkya and

prediction performance of earnings forecasts the case of u s multinationals prior accounting research has provided evidence of the information content of a company s actual or predicted accounting earnings prior studies have also found that factors such as firm size industry or systematic risk influence the accuracy of the earnings predictions this study investigates the accuracy and the consensus among forecasters of earnings estimates for u s domestic and u s multinational corporations companies were classified into a domestic or multinational type for this research following the criteria established by statement of financial accounting standards no 14 for required disclosure of foreign operations the empirical results indicate that the accuracy of earnings forecasts is significantly lower for purely domestic firms than for u s based multinationals likewise the level of consensus in earnings estimates submitted by financial analysts is significantly lower for u s domestic than for u s multinational firms

analysis and comparison of earnings forecast agents recent policy making activities of the sec 1978 1979 and the aicpa 1980 have rekindled interest in the subject of management s public disclosures of forecasts much of the forecasting literature and related policy considerations concern the comparative accuracy of managerial forecasts relative to other sources of earnings forecasts the basic premise is that if management forecasts are more accurate than those of other sources then it may be socially desirable to have the fasb or the sec govern forecast disclosures the economic implications of this policy issue were first discussed by gonedes dopuch and penman 1976 much of the subsequent empirical work has centered on assessments of the accuracy of managements forecasts in an effort to determine if they are potentially more informative a review of published research suggests that a number of conflicting results have been obtained one study reports that firm specific box and jenkins 1970 forecasts are superior to more accurate than those of management lorek mcdonald and patz 1976 while another concludes that analysts forecasts are superior to firm specific box jenkins forecasts and several other naive forecasting models brown and rozeff 1978 if one ignores differences in the samples and the time periods of these studies the results imply that analysts forecasts are more accurate

predicting forecast errors through joint observation of earnings and revenue forecasts abstract we propose a simple method to infer the forecast error associated with quarterly estimates of earnings and revenue before the firm announces realized earnings and revenue the method uses estimates of the profit margin implied by an analyst s forecasts of both earnings and revenue to identify forecasts that are likely to be optimistic or pessimistic the ability to anticipate forecast error permits a trading strategy that exploits the average market reaction following positive and negative earnings and revenue surprises

the january size effect anomaly or risk mismeasurement 1986 the january size effect anomaly or risk mismeasurement financial analysts journal vol 42 no 6 pp 63 70

financial analysts forecasts of earnings a better surrogate for market expectations abstract the specification of the market expectation of accounting numbers is a common feature of many empirical studies in accounting and finance givoly and lakonishok 1979 found that financial analysts forecasts have information content this study evaluates the quality of analysts forecasts as surrogates for the market expectation of earnings and compares it with that of prediction models commonly used in research results indicate that prediction errors of analysts are more closely associated with security price movements suggesting that analysts forecasts provide a better surrogate for market expectations than forecasts generated by time series models the study also identifies factors that might contribute to the performance of the financial analysts forecasts the broadness of the information set employed by analysts and to a lesser extent their reliance on information released after the end of the fiscal year appear to be important contributors to their performance

additional evidence on the information content of management earnings forecasts prior studies have documented that management earnings forecasts which exceed expected earnings good news forecasts are associated with significant positive abnormal stock returns on average when publicly released however no significant negative abnormal returns are observed immediately surrounding the release of management forecasts which are defined as bad news these findings conflict with the results to date on price reactions associated with earnings announcements for example ball and brown 1968 found that good news bad news annual earnings announcements are associated with positive negative abnormal returns in the months preceding and including the annual earnings announcement foster 1977 reported similar findings for quarterly earnings announcements beaver clarke and wright 1979 found a positive ordinal association between the magnitude of unexpected earnings the difference between actual earnings and expected earnings

firm characteristics and analyst following abstract this paper examines the major determinants of the number of analysts following a firm a simple model of analyst following is proposed and several firm characteristics are suggested that are likely to influence the extent of a firm s analyst following by either affecting the aggregate demand for or supply of analyst services or both for the firm almost all of these characteristics are found to be strongly significant in affecting the extent of analyst following of firms and the empirical results generally accord well with economic intuition

earnings announcements and attention constraints the role of market design abstract we identify a new channel market makers attention constraints through which earnings announcements for one stock affect the liquidity of other stocks when some stocks handled by a designated market maker have earnings announcements liquidity is lower for non announcement stocks handled by the same market maker with the largest effects coming from earnings surprises and stocks with high earnings response coefficients half of the liquidity decline reflects attention constraints binding on the individual market maker and the other half is explained by the market maker s inventory we further find that a market design change that increases automation alleviates the liquidity effect of attention constraints despite an increase in the number of stocks allocated to each market maker