Knowledge that Transforms

This paper provides descriptive data on standard sources of analyst forecasts used in accounting research: the Value Line Investment Survey, the Institutional Brokers Estimate System (IBES), and, toa lesser extent, the Standard & Poor's Earnings Forecaster and Zacks Investment Research. We examine the relative accuracy of seven forecast error metrics, using various combinations of Value Line and IBES forecasts of quarterly earnings per share (EPS) and actual earnings as reported by Value Line, IBES, and Compustat. (Appendix A reports the relative accuracy of a forecast error metric based on a smaller sample of Standard and Poor's forecasts of annual EPS). We find the forecast error metric that pairs the Value Line forecast EPS with the Value Line actual EPS produces the smallest absolute forecast errors. We also test the association of these forecast error metrics with threeday excess returns centered on the data of a quarterly earnings announcement. The strongest associations are obtained with the use of Value Line actual earnings and either Value Line or IBES forecast data. This suggests that the choice of actual EPS data is more crucial than the source of forecast EPS data. Our overall conclusion is that Value Line

Information Allocation, Private information, Information asymmetry, Disclosures

Alison J. Kirby, Stefan Reichelstein, Pradyot K. Sen, Tae-Young Paik, Participation, Slack, and Budget-Based Performance Evaluation, Journal of Accounting Research, Vol. 29, No. 1 (Spring, 1991), pp. 109-128

Auditing, Collusion, Principle-agent model

Information content, Earnings announcements, Risk-adjusted returns, Earnings components

In this paper we report the results of experimental markets designed to test a disclosure model based on the models of Dye [1985] and Jung and Kwon [1988]. These authors show that when receivers of information do not know whether senders possess private information, the senders will not fully disclose their private information. Their models were motivated by the discrepancy between the theoretical predictions for voluntary disclosures and empirical results. In the theoretical area, Grossman [1981] and Milgrom [1981] predicted that private information will be fully disclosed when disclosures are credible and receivers know the holder has private information; agents disclose to identify themselves as not possessing the worst possible information. Watts [1977] argued that voluntary disclosure will occur because of market pressures and the threat of regulatory intervention. Beaver [1977; 1988] described how auditing and legal liability may induce full disclosure. Nevertheless, empirical research indicates full disclosure is not always observed (e.g., Penman [1980] and Seligman [1986]).

Auditing, Management Advisory Services, Contracting, Economies of scope

Executive compensation, Firm performance, Interindustry differences, Stewardship objective

Analyst forecasts, Analyst forecast accuracy, Analyst competence, Systematic optimism

Mark Penno, John S. Watts, An Independent Auditor's Ex Post Criteria for the Disclosure of Information, Journal of Accounting Research, Vol. 29, Studies on Accounting Institutions in Markets and Organizations (1991), pp. 194-212