The Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analysts
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The Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analysts
The Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual AnalystsRan BamivKent State University G The Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual AnalystsGraduate School of Management, CBA Kent, OH 44242Phone:330-672-1112Fax: 330-672-2545E-mail: rbarniviu-bsa3.kent.ediiMark Myring Ball State University College of Business Muncie, IN 47306 Phone: 765-285-5108 Fax: 765-285-8024 E-mail: mmyring@bsu.eduWayne B. Thomas* University of Oklahoma Michael F. P The Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analystsrice College of Business 307 w. Brooks, Room 212BNorman, OK 73019 Phone: 405-325-5789Fax: 405-325-7348 E-mail: wthomasijpou.edu* Contact author.We appThe Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analysts
reciate the helpful comments of two anonymous reviewers, Patricia O’Brien (associate editor), A. Amir, s. Beninga, workshop participants at the univerThe Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual AnalystsRan BamivKent State University G The Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analystsso acknowledge Thomson Financial for providing I.'B.'E/S International and U.S. Detail History data.The Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual AnalystsAbstractWe test the ability of analyst characteristics to explain relative forecas The Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analystst accuracy across legal origins (common law versus civil law). Common law countries generally have more effective corporate governance mechanisms, incThe Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analysts
luding stronger investor protection laws and inputs provided through higher-quality financial reporting systems. In this type of environment, we prediThe Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual AnalystsRan BamivKent State University G The Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analystsbased incentives exist. In civil law countries, where the demand for earnings information is reduced because of weaker corporate governance mechanisms and lower-quality financial reporting, we predict that analysts with superior ability will less consistently provide superior forecasts. Results are The Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analystsconsistent with out-expectations and suggest an association between legal and financial reporting environments and analysts’ forecast behavior.KeywordThe Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analysts
s Analysts' characteristics, relative forecast performance, common law, civil law.JEL Descriptors G38, K22, M41The Association Between the Legal and FThe Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual AnalystsRan BamivKent State University G The Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analystsin relative forecast accuracy across legal origins. Tn common law countries, where investor protec lion laws ate stronger and financial reporting is generally perceived to have higher quality (I.a Porta, T.opez-de-Silanes, Shleifer, and Vishny 1997, 1998, 2000a; Ball. Kothari, and Robin 2000). the i The Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analystsncreased demand by investors for earnings information may create incentives for analysts to provide that information accurately. Analysts with superioThe Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analysts
r characteristics (e.g., ability, effort, experience, resources, etc.) are more likely to issue a superior forecast relative to their peers. In civil The Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual AnalystsRan BamivKent State University G The Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analyststivities to provide a superior earnings forecast. We expect that it will be more difficult to relate individual analysts’ characteristics to relative forecast performance in civil law countries.Examining the relation between relative forecast performance and analyst characteristics across legal regi The Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analystsmes provides evidence outside the United Stales, where die bulk of dris research has been conducted.1 Understanding analyst behavior in other environmThe Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analysts
ents provides additional insight into how analysts’ efforts in accurately forecasting earnings can contribute to the informationalhttps://khothuvien.cThe Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual AnalystsRan BamivKent State University G The Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analyststors' demands and analysts’ behavior (Defond and Hung 2002). As the value relevance of reported earnings declines, investors may have less demand for analysts’ earnings forecasts and demand other sources of information such as cash flow forecasts?Our results may also be helpful in investigating othe The Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analystsr related research issues, such as the value relevance of accounting numbers across countries. Prior research has focused primarily on estimating theThe Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analysts
relation between earnings and stock prices to understand investors' demand for accounting earnings (e.g., Ball. Kothari, and Robin 2000; Ali and HwangThe Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual AnalystsRan BamivKent State University G The Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analystsl origins consistent with investors’ demand for earnings information.Consistent with expectations, we find that the relation between analyst characteristics and relative forecast accuracy is stronger in common law countries. These results are consistent with analysts’ forecast behavior responding to The Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analysts the demand by investors for earnings information. In common law countries where investor protection laws are stronger, financial reporting is higher-The Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analysts
quality, and the demand by investors for earnings information is greater, analysts with superior abilities tend to distinguish themselves more clearlyThe Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual AnalystsRan BamivKent State University G The Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analyststion is strongest in the United States, followed by non-U.S. common law countries. The relation is weakest in the civil law countries. Results within the three origins of the civil law classification (French, German, and Scandinavian) suggest that the quality of financial reporting systems plays a r The Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analystsole in these relations beyond the influence of investor protection laws. Finally, we find some empirical support for the notion that cash flow forecasThe Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analysts
ts may substitute for earnings forecasts when earnings are less relevant (Defend and Hung 2002). The relation between analysts’ characteristics and reThe Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual AnalystsRan BamivKent State University G The Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analysts Section 2 develops the hypotheses. Section 3 outlines the research design and section 4 details the data and sample selection. Section 5 reports results and section 6 provides additional analyses. The paper concludes in section 7.2. HypothesesWe provide the following rationale for our tests. Common The Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analysts law countries are generally perceived to have stronger investor protection laws (La Porta, Lopez-de-Silanes, Shleifer, and Vishny 1997, 1998, 2000a)2The Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analysts
3 and higher-quality financial reporting (Ball, Kothari, and Robin 2000)/ In these settings, earnings information can play a more prominent role in cThe Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual AnalystsRan BamivKent State University G The Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analystsemand for that information when making decisions. The increased demand by investors offers proper economic incentives for analysts to compete in providing accurate forecasts of earnings. Those analysts having the ability and resources to outperform other analysts will, on average, do so because the The Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analystsmarket-based reward structure established by investor demand offers analysts fair incentives (Schipper 1991). In other words, the rewards for making aThe Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analysts
ccurate forecasts fairly outweigh the cost of gathering and processing information when investor protection laws are strong and the quality of the finThe Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual AnalystsRan BamivKent State University G The Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analyststc.) to more consistently outperform their peers, resulting in a stronger relation between analysts’ characteristics and relative forecast accuracy.In civil law countries, financial accounting systems are generally perceived to be of lower quality in terms of their ability to reflect accurately the The Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analystsunderlying economic activity of the firm (Ball, Kothari, and Robin 2000; Guenther and Young 2000: Bhattacharya, Daouk, and Welker 2003; Francis, KhuraThe Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analysts
na, and Pereira 2004). Financial accounting practices in civil law countries are oriented less toward serving the needs of outside investors (O’Brien The Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual AnalystsRan BamivKent State University G The Association Between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analystsfactors likely weaken the demand by investors for earnings information, which reduces the4Gọi ngay
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