Financial analysts as users of accounting information: Evidence about forecast revision activity after earnings announcements

Abstract

Purpose

To examine whether both the value relevance of accounting information, and the quality of earnings affect financial analysts' revisions of forecast annual earnings per share soon after an earnings release.

Design/methodology/approach

For firms whose accounting earnings provide either a basis for firm valuation or new information, analysts are predicted to revise earnings forecasts in response to the magnitude of surprise in the earnings release. Using publicly available data, regression analysis explores the influence of earnings response coefficients (ERCs), unexpected earnings, and interactions between ERCs, the association between earnings and returns, and unexpected earnings on forecast revisions after earnings announcements.

Findings

Empirical tests demonstrate a positive relation between the percentage of analysts revising forecasts soon after interim earnings announcements and firm‐specific ERCs, the interaction between the magnitude of earnings surprises, ERCs, and earnings‐returns associations, and pre‐announcement dispersion in forecasts. The results suggest that usefulness of earnings releases is related to the magnitude of new information in the release, the persistence of earnings innovations, the firm‐specific mapping between earnings and returns, and prior uncertainty about earnings.

Research limitations/implications

This paper examines forecast revisions only soon after earnings announcements. Future research should examine more general determinants of analysts' forecast revision activity.

Originality/value

This paper provides evidence about determinants of forecast revision frequency, a measure of how actively financial analysts provide information, an extension of prior research that focuses on analyst following as a measure of information environments.

Citation

Stuerke, P.S. (2005), "Financial analysts as users of accounting information: Evidence about forecast revision activity after earnings announcements", International Journal of Managerial Finance, Vol. 1 No. 1, pp. 8-24. https://doi.org/10.1108/17439130510584856