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Abstract:
The paper examines whether the documented bias in analyst earnings forecasts is intentional by investigating whether analysts account for the market's ability to adjust for the bias when forming their forecasts. The procedure follows three steps. First, I estimate on a firm-specific basis the forecast error for each firm decomposed in its two parts, bias and underreaction. I then employ an ERC model for each firm modified to include the expected bias and underreaction from step 1. The coefficient on the expected bias variable serves as the proxy for the market's ability to adjust for the bias. Finally I include this proxy in a cross-sectional regression explaining analyst forecast error. Finding a relationship between bias and the proxy for the market's ability to adjust for the bias will provide evidence on the joint hypothesis that (a) analysts know what the ability of the market to undo the bias for a firm is and (b) they form or issue their forecasts accordingly. A positive relationship is consistent with the existence of both reporting and selection bias. A negative relationship is consistent with the existence of reporting bias.

I find that analysts reduce the bias in their announced forecasts as the market's ability to adjust for the bias increases. This result provides direct evidence that analysts knowingly bias their forecasts. The negative relationship between the market's ability to adjust for the bias and the level of bias in the forecasts provides support for the existence of reporting bias in particular. Controlling for the sign of bias (optimistic vs. pessimistic) shows that optimistic bias is intentional. Even though I do not find evidence that pessimistic bias is intentional this may be due to the structural design of the tests. Finally, even though I find that the market seems to adjust for analyst underreaction, I do not find evidence that analyst underreaction is intentional.

Analyst forecasts; Bias; Optimism; Pessimism; Underreaction; Reporting bias; Selection bias

Abstract:
This paper contributes to the ongoing debate resulting from the SEC's requirement that foreign firms that trade on US exchanges reconcile their domestic financial statements to US GAAP. We address this issue by examining whether financial analysts revise their earnings forecasts following the filing of the 20F information. Since analysts are among the most informed market participants, their use (or lack of use) of the Form 20F information should provide direct evidence regarding the relevance of the 20F. Our results support that analysts use the earnings reconciliations contained in Form 20F, but we find no evidence that analysts use the equity reconciliations contained therein. We also find no evidence that analysts use the additional (item 18) US GAAP disclosures in Form 20F.

Abstract:
This paper documents a positive, statistically and economically significant effect of increased disclosure, in general, and IAS adoption, in particular, on firm value. We find strong positive abnormal returns at the announcement of IAS adoption and an economically significant long-run reduction in the cost of capital. This result is consistent with the theoretical literature, which documents the potential benefits of increased disclosure on the cost of capital and firm value. In addition, we find strong evidence that firms with lower valuations and higher growth opportunities experience greater valuation effects. Finally, we document a statistically significant increase in the number of analysts issuing recommendations as well as a significant upgrade in their recommendations after the IAS adoption announcement. These results highlight the importance of increased disclosure on minority shareholder protection and are consistent with IAS adoption being a positive signal of firm value.

International Accounting Standards, Information, Cost of Capital, Shareholder Protection, Signaling

Abstract:
We study how corporate boards and audit committees are associated with voluntary financial disclosure practices, proxied here by management earnings forecasts. We find that in firms with more effective board and audit committee structures, managers are more likely to make or update an earnings forecast, and their forecast is less likely to be precise, it is more accurate, and it elicits a more favorable market response. Together, our empirical evidence is broadly consistent with the notion that effective corporate governance is associated with higher financial disclosure quality.

Abstract:
Using a unique international setting where the effects of disclosure on firm value can be measured in a constant regulatory environment and in isolation of other confounding factors, this paper shows that firms can increase their value through their choice of accounting standards. Specifically, we document strong positive abnormal returns at the announcement of voluntary adoption of International Accounting Standards (IAS / IFRS) by a sample of international firms and an economically significant reduction in long-run returns, consistent with a reduction in the cost of capital. Consistent with these results we also document evidence of an upgrade in analyst recommendations after the IAS / IFRS adoption announcement and a reduction in the implied cost of capital. Finally, we find strong evidence that the documented abnormal returns are consistent with signaling and bonding benefits stemming from the reduction in asymmetric information. Our results highlight the importance of increased disclosure on minority shareholder protection and on corporate governance in general.

Abstract:
In this paper we examine the market reaction to the events that led to the adoption of Regulation Fair Disclosure (FD). The new regulation requires that if and when a firm discloses material nonpublic information to select individuals like analysts and institutional investors, it must make public announcement of that information immediately if the disclosure was intentional and promptly if it was unintentional. The rule has triggered a tremendous amount of debate as opponents raise the concern that the rule will result in a reduction in the amount and quality of information disseminated to the market. The SEC maintains that the rule will result in fairer markets. The stock market reaction around significant FD events supports the SEC's position. In particular, firms with poor information environments and greater propensity to selectively disclose information exhibit significantly positive abnormal returns on the first date that major provisions of the expected regulation are made public.

Regulation FD, economic consequences, information environment

Abstract:
This paper presents preliminary evidence of the effect of Regulation Fair Disclosure (FD) on the quantity and quality of firm-specific information released to the market by comparing analyst forecast data from pre-FD to post-FD time periods. By prohibiting selective disclosure of material information to privileged individuals, the Securities and Exchange Commission intends to provide a level playing field to all investors. However, opponents argue that FD has a negative impact by decreasing the quantity and quality of publicly available information. Consistent with this argument, we document a decrease in analyst following and an increase in forecast dispersion following the passage of FD.

regulation FD, analyst following, analyst forecast dispersion