Earnings Forecast-Based Returns Predictions: Risk Proxies in Disguise?

We investigate how institutional (non-commercial bank) investors that simultaneously invest in a firm's debt and equity (dual-holders) influence the firm's voluntary disclosure. Because institutional dual-holders trade on private information gleaned through lending relationships, we predict and find that borrowers increase earnings forecast disclosure to reduce these investors' information advantage following the origination of loans with their participation. We also show that the increase in disclosure is stronger when the access to a borrower's private information endows dual-holders with a greater information advantage and when the consequences of this access are likely to be more pronounced. We further find that institutional dual-holders earn excess returns when trading equity of non-guider firms following loan origination, but not when firms issue guidance, confirming that earnings disclosure helps level the playing field among investors. Our findings highlight that firms actively use disclosure to mitigate the adverse effect of dual-holders on their information environment.

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Conservatism and Analyst Earnings Forecast Bias

SSRN Electronic Journal ◽

10.2139/ssrn.1031981 ◽

2008 ◽

Cited By ~ 10

Author(s):

Henock Louis ◽

Thomas Z. Lys ◽

Amy X. Sun

Keyword(s):

Earnings Forecast ◽

Forecast Bias ◽

Analyst Earnings

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Earnings Management through Tax Reserves and Auditor-Provided Tax Services

Accounting and Finance Research ◽

10.5430/afr.v6n4p217 ◽

2017 ◽

Vol 6 (4) ◽

pp. 217

Author(s):

Chunlai Ye

Keyword(s):

Earnings Management ◽

Financial Reporting ◽

Income Smoothing ◽

Earnings Forecast ◽

Large Firms ◽

Fin 48 ◽

Management Incentives ◽

Consensus Forecasts ◽

Earnings Smoothing ◽

Tax Reserves

This study investigates whether firms continue to use tax reserves to achieve financial reporting objectives in the post-FIN 48 period and the effect of auditor-provided tax services on earnings management through tax reserves. Three types of earnings management incentives are considered in this study: meeting or beating the consensus forecasts, income smoothing, and taking an “earnings bath.” The analyses yield evidence that only non-large firms manipulate tax reserves to meet/beat earnings forecast in the post-FIN 48 period; however, tax reserves are still utilized by both large and non-large firms to smooth earnings. Moreover, evidence is provided that the auditor who provides more tax services facilitates large firms’ earnings smoothing in the post-FIN 48 period, implying independence impairment. But this behavior does not exist within non-large firms, arguably because the auditor does not compromise independence for less important clients.

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