Theoretical explanations to security analysts＇ forecast bias

As the representative of mature investors, security analysts＇ recommendations are guidance for most investors, However, a great deal of studies nearly draws the consistent conclusion, i.e. they are not as smart as we imagine, or the market doesn＇t trust their recommendations so much. The existence of optimistic bias in their recommendations has been supported by empirical data widely. Hence these make many papers to explore the reasons and try to give theoretical explanations. Based on prior researches, this paper mainly compares two theoretical models both based on mathematical methods.

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.

New European Union＇s Requirements and IFRS Practice Statement ＂Management Commentary＂： Does MD＆A Disclosure Quality Affect Analysts＇ Forecasts？

The Management Discussion and Analysis （MD＆A） is a mandatory document under the European Union＇s （EU） law. In 2003, the EU issued Directive 2003/51/EC, which broadened the information that firms have to provide in their MD＆A, and in 2010 the International Accounting Standards Board （IASB） issued the International Financial Reporting Standards （IFRS） Practice Statement ＂Management Commentary＂, a non-binding guidance for the presentation of this document. The aim of this paper is to examine the relationship between MD＆A disclosure quality and properties of analysts＇ forecasts. In fact, although most studies found that financial analysts mainly refer to financial statement data in forecasting earnings, there are few researches highlighting the importance of MD＆A disclosures for financial analysts. On this basis, Ramnath, Rock, and Shane （2008） called for researches in order to better understand the relationship between the information really used by analysts and their forecasts. To assess the quality of MD＆A disclosures, we developed a multidimensional measure on the basis of the EU requirements and the IFRS Practice Statement, and then we regressed this variable on both forecast accuracy and dispersion. The findings show that our measure of MD＆A disclosure quality is significantly and positively related to forecast accuracy. We conducted other analyses in order to better understand the previous relationship and we found that, if we analyze the different information contained in the MD＆A statement, financial analysts consider useful accounting and financial data in forecasting earnings. These results enhance our understanding of the role of MD＆A disclosures in the wide set of information that firms provide to financial statement users.

The Impact of Competition on Analysts’Forecasts:A Simple Agent-Based Model

This paper builds an agent-based model to study the impact of analyst competition on analyst optimism.Two strategies(a catering strategy and a pressure strategy)are used to model analysts conflicts of interest between listed corporations and institutional clients.The finding suggests that the relationship between competition and analyst optimism is nonlinear.Low-level competition generates more analyst unbiased forecasts.However,the condition of no competition or high-level competition generates more analyst optimistic forecasts.The empirical test also confirms that analysts issue less biased earnings forecasts under the condition of low-level competition.

Mandatory CSR disclosure and analyst forecast properties:Evidence from a quasi-natural experiment in China

Based on a quasi-natural experiment that mandates a subset of listed firms to issue standalone corporate social responsibility(CSR)reports,we examine whether mandatory CSR disclosure improves analysts’information environment.We focus on two properties of analysts’earnings forecasts:forecast error and forecast dispersion.We find that the mandatory issuance of standalone CSR reports is related to less forecast error and less dispersed forecasts,and the effect varies with the firm-level information environment and provincelevel marketization.Additional tests show that the improvement in forecast properties is mainly driven by CSR reports that i)are of high quality and ii)contain more long-term-oriented information than other CSR reports.Our findings provide evidence that mandatory CSR disclosure plays an important informational role for financial analysts.

Stock index adjustments and analysts' forecast optimism:A quasi-natural experiment on the CSI 300 Index

As stock index adjustments comprise a basic system of capital market,their potential influence on analysts’earnings forecasts is worthy of research.Based on a research sample of 23 adjustments to the CSI 300 Index from June 2007 to June 2018 and the backup stocks announced during the same period,this study examines the impact of additions to stock index on analysts’forecast optimism using a staggered difference-in-differences model.The research results show that after stocks are added to the stock index,analysts’earnings forecast optimism about these stocks increases significantly.Cross-sectional analysis indicates that this increase is more significant when the market is bullish,institutional ownership is low,the ratio of listed brokerage firms is low,star analyst coverage is low,firms show seasoned equity offering activity,the ratio of analysts from the top five brokerage firms ranked by commission income is high,and the analysts’brokerage firms are shareholders.However,analystlevel tests find that analysts’ability helps to reduce the impact of additions to stock index on earnings forecast optimism.Furthermore,additions to stock index significantly increase analyst coverage and forecast divergence.Economic consequences tests find additions to stock index significantly increases stock price synchronization,which is partly mediated by analysts’earnings forecast optimism.This study enriches the literature on the impact of basic capital market systems and analyst behavior.The findings suggest that investors should rationally evaluate analysts’earnings forecasts for stocks added to the stock index and obtain further information from various channels to improve asset allocation efficiency.

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.

Labor protection,information disclosure and analyst forecasts:Evidence from China's Labor Contract Law

Labor protection increases employees’stability and strengthens their monitoring role,improving firms’information environment and increasing analysts’earnings forecast accuracy.Using the implementation of China’s Labor Contract Law as a quasi-natural experiment,we find that labor protection significantly improves analyst forecasts.This positive impact is stronger when agency problems are weaker,board independence is greater,corporate reputation is better and industry competition is more intense.Enhanced labor protection significantly reduces firms’business risk and accrual-based earnings management,decreases stock price synchronicity and increases market pricing efficiency.Our findings of significant impacts of China’s Labor Contract Law on analysts’forecasting behaviors offer important guidance for promoting the development of the Chinese capital market and policy making in labor protection.

Accounting standard changes and foreign analyst behavior:Evidence from China

This study investigates changes in foreign analyst behavior before and after Chinese New Accounting Standards was implemented during 2007.The empirical results show that after the new accounting standards were implemented,forecast error among foreign analysts decreased in both absolute and relative terms in comparison with domestic analysts,and foreign analysts forecast earnings more frequently than they did before the new accounting standards.These results imply that the implementation of new accounting standards in the Chinese capital market helped mitigate both information asymmetry between listed firms in China and foreign investors,and the "home bias" of foreign analysts.It also increased the attractiveness of listed firms and facilitated international communication and cooperation.This study also has significant implications for how resource allocation efficiency in the Chinese capital market can be raised and how the "introducing in" policy should be assessed.