Essay I: The Role of Analysts in Intra-industry Information Transfer...[ Read more ]

Essay I: The Role of Analysts in Intra-industry Information Transfer

This study investigates the role of analysts in improving the efficiency of intra-industry information transfer. The prior literature suggests that management forecasts convey information relevant to other firms in the same industry, but that such information is not immediately and efficiently impounded into the stock prices of such firms. The empirical evidence presented in this study shows that analysts who cover several firms in an industry help to transfer such information. Specifically, I find that analysts who cover a firm issuing a management forecast provide more accurate and timely earnings forecast revisions following the issuance of this management forecasts for other firms in the same industry than analysts who do not cover the firm issuing the management forecast. This effect is stronger for analysts who are experienced in covering the firm issuing the management forecast. Investors are more responsive to forecast revisions made by analysts following the firm issuing the management forecast.

Essay II: Do Managers Fully Understand Their Own Accruals

I examine whether or not managers fully understand the information contained in their own accruals. I find that managers of firms with higher prior working capital accruals have higher management forecast errors and are more likely to miss the lower bound of their own forecasts. These results are stronger for non-discretionary working capital accruals than for discretionary working capital accruals, are weaker when firms’ accrual quality is high and are not influenced by incentives such as merger and acquisition activities, external financing or firm specific litigation risk. These findings suggest that the behavior of managers is not caused by strategic reasons. Additional related analyses are also consistent with the hypothesis that managers are making unintentional mistakes with respect to their own accruals. Overall, these results suggest that managers do not fully understand the information contained in their own accruals.