Earnings seasonality,management earnings forecasts and stock returns

We examine whether management earnings forecasts(MEFs)help reduce the stock return seasonality associated with earnings seasonality around earnings announcements(EAs)in Chinese A-share markets.We find that firms in historically low earnings seasons outperform firms in high earnings seasons by 2.1%around MEFs.Firms in low earnings seasons also have higher trading volume and return volatility than their counterparts around EAs and MEFs.MEFs significantly reduce the ability of historical seasonal earnings rankings to negatively predict announcement returns,volume and volatility around EAs.The reduction effects are stronger when MEFs are voluntary or made closer to EAs.The evidence suggests that MEFs facilitate the correction of investors’tendency to extrapolate earnings seasonality and its resulted stock mispricing.

Business and financial information integration and voluntary management earnings forecasts

In this study,the impact of business and financial information integration(BFⅡ)on the voluntary management earnings forecasts(VMEFs)of listed firms in China between 2008 and 2018 is investigated.Drawing on litigation cost and ability signaling theories,we find that the adoption of BFⅡencourages top managers to disclose VMEFs.BFⅡfirms are identified through the textual analysis of management discussion and analysis(MD&A)reports,and the empirical results indicate that BFⅡfirms have a higher probability and frequency of issuing VMEFs than non-BFⅡfirms.The results remain robust after we identify causality by applying a propensity score matching and difference-in-differences(PSM-DID)test and use an alternate measure of BFⅡ.Further tests show that BFⅡfirms issue more accurate VMEFs and are able to issue them at an earlier stage.We also find that the positive relationship between BFⅡand VMEFs is weakened if the media expresses concern about the uncertainty of BFⅡadoption.

Enforcement actions and their effectiveness in securities regulation:Empirical evidence from management earnings forecasts

Due to resource constraints,securities regulators cannot find or punish all firms that have conducted irregular or even illegal activities(hereafter referred to as fraud).Those who study securities regulations can only find the instances of fraud that have been punished,not those that have not been punished,and it is these unknown cases that would make the best control sample for studies of enforcement action criteria.China's mandatory management earnings forecasts solve this sampling problem.In the A-share market,firms that have not forecasted as mandated are likely in a position to be punished by securities regulators or are attempting to escape punishment,and their identification allows researchers to build suitable study and control samples when examining securities regulations.Our results indicate that enforcement actions taken by securities regulators are selective.The probability that a firm will be punished for irregular management forecasting is significantly related to proxies for survival rates.Specifically,fraudulent firms with lower return on assets(ROAs) or higher cash flow risk are more likely to be punished.Further analysis shows that selective enforcement of regulations has had little positive effect on the quality of listed firms' management forecasts.

Major government customer and management earnings forecasts

This paper examines whether customer base composition in the US,that is,whether a firm's major customers are government entities or publicly traded companies,affects the properties of its management earnings forecasts(MEFs).Using a sample of 1,168 MEFs from 1998 to 2014,we find that firms whose major customers are government entities(i.e.,govemment suppliers)issue more precise and more accurate MEFs than firms whose major customers are public companies(i.e.,corporate suppliers).Moreover,when managers disclose negative information to the market,earnings forecasts issued by government suppliers have greater price impact than those issued by corporate suppliers.Collectively,our empirical results suggest that having major govemment customers has a positive impact on the quality of MEFs.

Does an abnormal change in deferred tax assets interfere with analysts' earnings forecasts?

In 2007,China adopted the single balance sheet liability method for tax accounting,but its shortcomings have emerged.I sample A-share listed companies from 2007 to 2018 to study whether an abnormal change in deferred tax assets interferes with analysts’earnings forecasts and find that an abnormal change in deferred tax assets increases the error and divergence of these forecasts.Compared with a negative abnormal change in deferred tax assets,a positive abnormal change has a greater impact on earnings forecasts.Additionally,the level of corporate governance,audit quality and analysts’professional ability have moderating effects on the correlation between an abnormal change in deferred tax assets and earnings forecasts.However,an abnormal change in deferred tax liabilities does not have a significant impact on that correlation.

The effect of non-recurring items on analysts' earnings forecasts

This article discusses the effects of non-recurring profits and losses on statement users' decision-making processes from the perspective of securities analysts. We examine the relationship between analysts' forecast revisions and firms' non-recurring earnings. We find that 1) non-recurring gains and losses can influence analysts' earnings forecast revision; 2) compared with nonrecurring items resulting from policy changes, analysts are more concerned about those attributed to changes in business scope; 3) if listed companies use non-recurring items to turn losses into gains during earnings management,it will weaken the effects of non-recurring items on analysts' earnings forecast revision. The results suggest that non-recurring items that result from changes in business scope incorporate information that users need for the future operation of the business. This article verifies the information relevance of nonrecurring items and provides evidence for the necessity of non-recurring item disclosure.

Earnings disaggregation and analysts＇ forecasts

Accounting concepts dictate that separately disclosed components should contain separate useful information. This paper examines the relations between income statement components and analysts＇ earnings forecasts and forecast errors. Regressions explaining earnings forecasts using earnings components provide a better fit than regression using just aggregate income to explain forecasts. We interpret this as consistent with the hypothesis that analysts use incremental information in components not available in aggregate income. However, additional tests based on predictability of forecast errors indicate that analysts do not incorporate all information available in components into earnings forecasts. In addition, this inefficiency appears to increase at longer forecast horizons.

Improvements onthe Earnings Forecast Model——Based on Correlation between Financial Ratio, Auditor Opinion and Future Earnings

This paper aims to find evidence for the improvements on the present earnings forecast models through analyzing the correlation among financial ratios, auditor opinion of listed companies and their future earnings. This paper uses two statistical regression methods including Logistic model and Linear model to examine the inner interaction between financial ratios and future earnings from qualitative and quantitative perspectives respectively. Empirical tests find that financial ratios, especially ROE, can help to predict future earnings. Then we add auditor opinion variable into Logistic model to test whether going concern opinion in the auditor reports can be helpful for earnings forecast. Result shows the degree of optimistic statement of going concern opinion is significantly correlated with future earnings but with the disturbance of earnings management.

The effect of earnings forecast precision on firm value and insider trading under voluntary disclosure in Taiwan

Taiwan changed its earnings forecast policy from mandatory to voluntary disclosure in 2005. In this study, the inferences of voluntary earnings forecast are examined based on forecasts issued by listed firms. This study suspects that insiders have a temptation to strategically manipulate financial forecast information to influence markets and thus receive extra rents. Under the new earnings forecast disclosure policy, the number of disclosing firm decreases but the precision of earnings forecast increases. The empirical result from dynamic panel data evidences the forecast error of voluntary disclosure may negatively impact firm values. Furthermore, there is a positive relationship between insiders＇ trading profit and manipulation of earnings forecasts. As volatility in insider manipulation increases, it is difficult for the investors to predict the real intention of insiders, and insiders may achieve greater benefits from trading. This study also observes that many listed companies hold investor conferences to provide earnings guidance in Taiwan. The reason may be that investor conference is more flexible and has less forecast error cost than the formal financial forecast. This study provides important insights into earnings forecast policy in emerging markets. The competent authority should improve corporate governance and develop monitoring functions to abate forecast manipulation.

Customer concentration and management earnings forecast

Customers are one of the key external stakeholders for a company.Using Chinese listed companies’data from 2007 to 2015,this paper examines the impact of customer concentration on information disclosure from the perspective of management earnings forecast.Empirical results show that a more concentrated customer base induces companies to disclose more positive earnings forecast.In addition,the positive association between customer concentration and management earnings forecast is more pronounced with higher economic policy uncertainty.Further analyses reveal that companies issue more positive earnings forecast to reduce the financing risk and protect their relationshipspecific investment.Also,customer concentration reduces the consistency of earnings forecast since the deviation of the forecast performance and the actual performance is greater.This paper enriches the literature on the determinants of management earnings forecast and the effects of stakeholders on corporate financial behaviour.Our findings also provide implications for investors,regulators,and various stakeholders to understand management earnings forecast decisions.

The relationship between political connections and the mutual fund performance:Evidence from the US

This paper examines the effect of political connections between mutual fund managers and politicians on the fund performance.Using the publicly available data of individual political donations,we regard the mutual funds as politically connected when their managers make financial contributions to politicians.First,we show that aggregated stock holding changes of politically connected funds predict subsequent abnormal stock returns around the earnings announcement day,implying that the political connection promotes managers’stock picking abilities.Further evidence derived from the sample of entry buys and exit sells shows that politically connected funds outperform politically non-connected funds by 82 basis points annually.Second,we provide evidence that earnings forecast accuracy for the firms whose stocks are held by politically connected funds is improved significantly when time is approaching the announcement date,highlighting the importance of political channels through which information flows between firms and the market are facilitated.