Classification Shifting in an International Setting: Investor Protection and Financial Analysts Monitoring

2013 ◽  
Vol 12 (2) ◽  
pp. 27-50 ◽  
Author(s):  
Bruce K. Behn ◽  
Giorgio Gotti ◽  
Don Herrmann ◽  
Tony Kang
Keyword(s):  
Investor Protection ◽  
Financial Analysts ◽  
Data Availability ◽  
Publicly Traded ◽  
Financial Analyst ◽  
Analyst Following ◽  
Classification Shifting ◽  
International Setting ◽  
Core Earnings

ABSTRACT Prior research on publicly traded U.S. firms provides evidence that managers engage in classification shifting to opportunistically manage “core” earnings. We extend this line of research in a broader international setting, by examining (1) whether the level of investor protection affects managers' decisions to engage in classification shifting behavior and (2) whether coverage by financial analysts mitigates this behavior. Based on an international sample of firms from 40 countries, we observe evidence consistent with classification shifting in both strong and weak investor protection countries using four separate measures of investor protection. We then explore the potential monitoring role of financial analysts in mitigating classification shifting. We provide evidence that higher financial analyst following mitigates classification shifting, primarily in weak investor protection countries. Overall, our results provide evidence of classification shifting in a broad international setting and evidence of financial analysts' influence in reducing this form of earnings management. Data Availability: The data are available from public sources identified in the text.

The effect of financial analysts on the economic implications of disclosed lease information – a note

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Su-Jane Hsieh ◽  
Yuli Su
Keyword(s):  
Stock Returns ◽  
Cash Flow ◽  
Stock Prices ◽  
Predictive Value ◽  
Financial Analysts ◽  
Financial Analyst ◽  
Analyst Following ◽  
Analyst Coverage ◽  
Content Type ◽  
The Impact

PurposeThe purpose of this paper is to investigate whether financial analyst coverage affects the dissemination of disclosed operating lease information into cash flow predictions and stock prices.Design/methodology/approachThe difference in lease expense between capital/finance lease and operating lease reporting is estimated based on the approach in Hsieh and Su (2015). This difference is referred to as the earnings impact from operating lease capitalization and is only available from footnotes. The authors then include the level of financial analyst following in a cash flow model to study its impact on the cash flow predictive value of the earnings impact. Similarly, the level of financial analyst following is inserted in an earnings-return model to assess the effect of analyst coverage on the association between contemporaneous stock returns and earnings impact.FindingsThe authors find that the cash flow predictive value of the earnings impact shifts to the interaction between analyst coverage and the earnings impact, suggesting that the decision-usefulness of the earnings impact is conditioned on the level of analyst following. Nevertheless, the authors find that the earnings impact continues to have explanatory value for the contemporaneous stock returns, while the interaction between analyst coverage and the earnings impact does not. This finding suggests that the earnings impact is already fully reflected in stock prices regardless of analyst following.Research limitations/implicationsSince the estimation of the earnings impact from reporting operating leases as capital leases is based on the method developed by Imhoff et al. (1991), the results and inferences are thus constrained by the validity of the method.Practical implicationsThe authors find that financial analyst activities accelerate the incorporation of the earnings impact from operating lease capitalization in cash flow predictions, but it does not promote the impounding of the earnings impact into stock prices. This finding suggests that financial analysts' influence on the dissemination of the earnings impact hinges on the type of economic activity, and failing to consider the financial analyst following in studying the cash flow predictive value of the earnings impact would obscure the findings.Originality/valueThe authors extend the findings of prior research that financial analysts' activities promote the incorporation of firm-specific information into stock prices by investigating the impact of financial analysts on the dissemination of disclosed operating lease information.

scholarly journals Do Financial Analysts Facilitate Investors’ Assessment Of Earnings?: Evidence From The Korean Stock Market

2016 ◽  
Vol 32 (5) ◽  
pp. 1465
Author(s):  
Sukyoon Jung ◽  
Yong-Seok Lee ◽  
Seong-jin Choi
Keyword(s):  
Stock Market ◽  
Stock Returns ◽  
Emerging Market ◽  
Financial Analysts ◽  
Analyst Following ◽  
Earnings Information ◽  
Information Intermediaries ◽  
Korean Stock Market

This paper seeks to enhance our understanding of financial analysts in assisting market investors’ use of accounting earnings in the Korean stock market. We examine whether stock returns differentially reflect earnings information for firms with analyst coverage. We propose that the role of analysts as external monitors as well as information intermediaries enhances the market investors’ valuation of earnings. We find that market valuation of earnings is higher for firms with analyst following. Furthermore, market investors’ valuation of earnings increases (or decreases) with the number of analysts (or with the dispersion of analysts’ forecasts). This suggests that the beneficial effect of analysts arises through the quantity and quality of analysts’ information. This study contributes to the literature by investigating the important role of analysts in emerging market.

Can External Monitoring Affect Corporate Financial Reporting and Disclosure? Evidence from Earnings and Expectations Management

2014 ◽  
Vol 28 (3) ◽  
pp. 529-559 ◽  
Author(s):  
Alfred Zhu Liu
Keyword(s):  
Financial Reporting ◽  
Institutional Investors ◽  
Financial Analysts ◽  
Data Availability ◽  
Analyst Following ◽  
Investment Style ◽  
External Monitoring ◽  
Expectations Management ◽  
Reported Earnings ◽  
Corporate Financial Reporting

SYNOPSIS This study examines whether financial analysts and institutional investors play a disciplinary role in monitoring corporate financial reporting and disclosure. Using a sample of firms that meet or marginally beat analysts' forecasts, likely through upward earnings management and downward expectations management, this study shows that managers' use of the two tactics is associated with monitoring measures, including analyst following, analyst experience and independence, institutional ownership, and institutional investors' experience and investment style. Managers under more effective monitoring by analysts and institutional investors are more likely to manage expectations downward than to manage earnings upward. Overall, the findings are consistent with financial analysts and institutional investors playing a monitoring role in constraining distortions in reported earnings and inducing timely disclosure of bad news. Data Availability: All data are from public sources.

The Underpricing of Initial Public Offerings and Private Placements of Equity in China

2018 ◽  
pp. 572-591
Author(s):  
Gang Nathan Dong ◽  
Ming Gu
Keyword(s):  
Initial Public Offerings ◽  
Seasoned Equity Offerings ◽  
Equity Offerings ◽  
Publicly Traded ◽  
Ipo Underpricing ◽  
Public Offerings ◽  
Private Placements ◽  
Strategic Role ◽  
International Setting

While the costs borne by firms in raising external capital through initial public offerings (IPOs) and seasoned equity offerings are well documented, the strategic role of IPO underpricing in the market for raising equity after the IPO remains largely unstudied, particularly in an international setting. In China publicly traded firms often issue post-IPO equity through private placements of equity (PEPs), rather than public offerings. This chapter examines the relationship between the pricing behavior of IPOs and the issuance choice of future PEPs. Do companies use IPO underpricing as a strategic precursor toward raising additional capital in future PEPs? If the success of initial offerings of equity can help improve the capital-raising capacity and reduce the issuance cost in subsequent offerings, high-quality firms will intentionally pursue a multiple-issue strategy by lowering the IPO offer price in order to raise more capital at a higher price in PEPs.

Integrated reporting and capital markets in an international setting: The role of financial analysts

2019 ◽  
Vol 28 (7) ◽  
pp. 1465-1480 ◽  
Author(s):  
Eduardo Flores ◽  
Marco Fasan ◽  
Wesley Mendes‐da‐Silva ◽  
Joelson Oliveira Sampaio
Keyword(s):  
Capital Markets ◽  
Financial Analysts ◽  
Integrated Reporting ◽  
International Setting

scholarly journals Income Classification Shifting and Financial Analysts’ Forecasts

2019 ◽  
Vol 22 (02) ◽  
pp. 1950010
Author(s):  
Shanshan Pan ◽  
Michael Lacina ◽  
Haeyoung Shin
Keyword(s):  
Financial Analysts ◽  
Earnings Forecasts ◽  
Information Intermediaries ◽  
Ex Post ◽  
Income Statement ◽  
Classification Shifting ◽  
Core Earnings

Income classification shifting involves misclassifying core expenses into non-core items to boost core earnings. Managers engage in classification shifting because they believe they can manage the perceptions of investors and financial analysts. We examine analysts’ earnings forecasts to determine whether analysts can identify classification shifting ex post and how they respond to shifted income statement components. Analysts play a role as information intermediaries between firms and investors. We find that analysts respond less to increased core earnings from classification shifting. However, analysts fail to gauge the full impact of classification shifting, leading to more optimistically biased and less accurate forecasts.

Materiality Judgments and the Resolution of Detected Misstatements: The Role of Managers, Auditors, and Audit Committees

2012 ◽  
Vol 87 (5) ◽  
pp. 1641-1677 ◽  
Author(s):  
Marsha B. Keune ◽  
Karla M. Johnstone
Keyword(s):  
Audit Committee ◽  
Audit Fees ◽  
Managerial Incentives ◽  
Data Availability ◽  
Audit Committees ◽  
Analyst Following ◽  
Financial Expertise ◽  
Using Data

ABSTRACT This study investigates how manager and auditor incentives, along with audit committee characteristics, are associated with materiality judgments about detected misstatements. Using data on detected misstatements that occurred between 2003 and 2006, we find auditors' incentives to protect their reputations weaken the effect of managerial incentives associated with the pressure created by analyst following; auditors are less likely to allow managers to waive material misstatements as audit fees increase. Regarding audit committee characteristics, results reveal that audit committees with greater financial expertise are less likely to allow managers to waive material misstatements compared to audit committees with less expertise. Data Availability: Data used in the study are available from public sources.

Comprehensive Income: which potential effects on firms' performance evaluation and users' decision process?

2016 ◽  
pp. 55-94
Author(s):  
Pier Luigi Marchini ◽  
Carlotta D'Este
Keyword(s):  
Performance Evaluation ◽  
Decision Process ◽  
Financial Analysts ◽  
Listed Companies ◽  
Financial Statement ◽  
Comprehensive Income ◽  
Other Comprehensive Income ◽  
Gains And Losses ◽  
The Impact

The reporting of comprehensive income is becoming increasingly important. After the introduction of Other Comprehensive Income (OCI) reporting, as required by the 2007 IAS 1-revised, the IASB is currently seeking inputs from investors on the usefulness of unrealized gains and losses and on the role of comprehensive income. This circumstance is of particular relevance in code law countries, as local pre-IFRS accounting models influence financial statement preparers and users. This study aims at investigating the role played by unrealized gains and losses reporting on users' decision process, by examining the impact of OCI on the Italian listed companies RoE ratio and by surveying a sample of financial analysts, also content analysing their formal reports. The results show that the reporting of comprehensive income does not affect the financial statement users' decision process, although it statistically affects Italian listed entities' performance.

Concurrent Earnings Announcements and Analysts' Information Production

2019 ◽  
Vol 95 (1) ◽  
pp. 165-189 ◽  
Author(s):  
Matthew Driskill ◽  
Marcus P. Kirk ◽  
Jennifer Wu Tucker
Keyword(s):  
Earnings Announcements ◽  
Financial Analysts ◽  
Earnings Forecasts ◽  
Data Availability ◽  
Limited Attention ◽  
Conference Calls ◽  
Stock Recommendations ◽  
Rich Information ◽  
Sample Firm ◽  
Jel Classifications

ABSTRACT We examine whether financial analysts are subject to limited attention. We find that when analysts have another firm in their coverage portfolio announcing earnings on the same day as the sample firm (a “concurrent announcement”), they are less likely to issue timely earnings forecasts for the sample firm's subsequent quarter than analysts without a concurrent announcement. Among the analysts who issue timely earnings forecasts, the thoroughness of their work decreases as their number of concurrent announcements increases. In addition, analysts are more sluggish in providing stock recommendations and less likely to ask questions in earnings conference calls as their number of concurrent announcements increases. Moreover, when analysts face concurrent announcements, they tend to allocate their limited attention to firms that already have rich information environments, leaving behind firms in need of attention. Overall, our evidence suggests that even financial analysts, who serve as information specialists, are subject to limited attention. JEL Classifications: G10; G11; G17; G14. Data Availability: Data are publicly available from the sources identified in the paper.

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