Javascript must be enabled to continue!
The Role of Analysts in Differentially Interpreting Earnings Surprises
View through CrossRef
It is commonly believed that relatively large absolute earnings surprises trigger more differential interpretations compared to small earnings surprises (e.g., Bamber 1987; and Morse et al. 1991). However, prior research provides no direct support for this belief. This study tests the prediction that, when forecasting future earnings, the weight the average analyst places on their own idiosyncratic information processing skills (or the degree to which they differentially interpret earnings) increases more after relatively large absolute earnings surprises. This prediction is based on the argument that less persistent earnings surprises (in this case relatively large earnings surprises) cause analysts to rely less heavily on the information commonly observed in earnings surprises, and to rely more heavily on their own idiosyncratic information processing skills. Using forecasts of quarterly earnings, we examine changes in the relative weight analysts place on their private information around prior quarterly earnings announcements. Consistent with our expectations, we show that the weight analysts place on their private information increases more after relatively large earnings surprises compared to small earnings surprises. We also show that the weight analysts place on their private information increases more after negative earnings surprises, which are also less persistent. Our evidence suggests that the relative importance of analysts' interpretive informational role varies across earnings announcements, and is more prevalent when there is likely to be more demand for analysts' differential interpretations. We show that this effect serves to improve the accuracy of the mean forecast.
Title: The Role of Analysts in Differentially Interpreting Earnings Surprises
Description:
It is commonly believed that relatively large absolute earnings surprises trigger more differential interpretations compared to small earnings surprises (e.
g.
, Bamber 1987; and Morse et al.
1991).
However, prior research provides no direct support for this belief.
This study tests the prediction that, when forecasting future earnings, the weight the average analyst places on their own idiosyncratic information processing skills (or the degree to which they differentially interpret earnings) increases more after relatively large absolute earnings surprises.
This prediction is based on the argument that less persistent earnings surprises (in this case relatively large earnings surprises) cause analysts to rely less heavily on the information commonly observed in earnings surprises, and to rely more heavily on their own idiosyncratic information processing skills.
Using forecasts of quarterly earnings, we examine changes in the relative weight analysts place on their private information around prior quarterly earnings announcements.
Consistent with our expectations, we show that the weight analysts place on their private information increases more after relatively large earnings surprises compared to small earnings surprises.
We also show that the weight analysts place on their private information increases more after negative earnings surprises, which are also less persistent.
Our evidence suggests that the relative importance of analysts' interpretive informational role varies across earnings announcements, and is more prevalent when there is likely to be more demand for analysts' differential interpretations.
We show that this effect serves to improve the accuracy of the mean forecast.
Related Results
Revenue Growth and Stock Returns
Revenue Growth and Stock Returns
This paper examines the relation between revenue surprises and future stock returns. It also investigates how analysts update their earnings forecasts following announcements of r...
Earnings Management to Avoid Earnings Decreases and Losses: Empirical Evidence from Japan
Earnings Management to Avoid Earnings Decreases and Losses: Empirical Evidence from Japan
The main purpose of this study is to investigate whether and how Japanese firms manage reported earnings. We first investigate whether Japanese firm managers engage in earnings man...
Do Transient Institutions Overreact to Small Negative Earnings Surprises?
Do Transient Institutions Overreact to Small Negative Earnings Surprises?
We use a proprietary database of institutional investors’ daily stock transactions to examine transient institutions’ trading behavior in response to announcements of small negativ...
The Impact of Firm Characteristics on Individual Analysts' Earnings Forecast Accuracy in Emerging Markets
The Impact of Firm Characteristics on Individual Analysts' Earnings Forecast Accuracy in Emerging Markets
In emerging markets, investors suffer largely due to high information asymmetry and low market regulations. Financial analysts play a vital role in providing investors with insight...
Cometary Physics Laboratory: spectrophotometric experiments
Cometary Physics Laboratory: spectrophotometric experiments
<p><strong><span dir="ltr" role="presentation">1. Introduction</span></strong&...
Valuation Implications of Unconditional Accounting Conservatism: Evidence from Analysts’ Target Prices
Valuation Implications of Unconditional Accounting Conservatism: Evidence from Analysts’ Target Prices
We examine whether financial analysts understand the valuation implications of unconditional accounting conservatism when forecasting target prices. While accounting conservatism a...
Do Analysts Sacrifice Forecast Accuracy for Informativeness?
Do Analysts Sacrifice Forecast Accuracy for Informativeness?
We analyze whether analysts sacrifice forecast accuracy for informativeness by examining: (1) the association between analysts’ deviations from management guidance and earnings man...
Returns Momentum, Returns Reversals and Earnings Surprises
Returns Momentum, Returns Reversals and Earnings Surprises
Abnormal stock returns measured over intervals of less than a year exhibit positive serial correlation, or returns momentum, while returns measured over longer periods exhibit nega...

