Firm size, Excess returns, LIFO adoption, Tax savings

Accounting changes, LIFO, Market response, Annual earnings announcements

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

William R. Baber, Eugene H. Brooks, William E. Ricks, An Empirical Investigation of the Market for Audit Services in the Public Sector, Journal of Accounting Research, Vol. 25, No. 2 (Autumn, 1987), pp. 293-305

Ricks [1982] found that stock returns near the earnings disclosure dates of 1974 LIFO adopters were negative and significantly lower than returns near the earnings disclosure dates of firms not using LIFO. Given that firms adopting LIFO in 1974 were voluntarily switching to an accounting method providing often significant tax savings, it is not obvious why investors would have reacted negatively. Nor is it likely that investors were unaware of many of the firms' LIFO adoption decisions. This study presents evidence suggesting that the negative excess returns observed by Ricks [1982] were associated with, and possibly due to, analysts' systematic overestimates of earnings of firms adopting LIFO in 1974. We are aware of no previous study documenting systematic errors in analysts' earnings forecasts conditional on a voluntary accounting method change.

Robert E. Hoskin, John S. Hughes, William E. Ricks, Evidence on the Incremental Information Content of Additional Firm Disclosures Made Concurrently with Earnings, Journal of Accounting Research, Vol. 24, Studies on Alternative Measures of Accounting Income (1986), pp. 1-32