The Effect Firm Reporting Quality Has on the Issuance and Properties of Disaggregated Earnings Forecasts

49 Pages Posted: 7 Dec 2011 Last revised: 16 Jul 2012

See all articles by Pawel Bilinski

Pawel Bilinski

Bayes Business School, City University London

Michael Eames

Santa Clara University - Accounting

Date Written: August 2012

Abstract

We propose that analysts are more likely to disaggregate earnings-per-share (EPS) forecasts into revenue and expense estimates when quality of firm financial reporting is low. The disaggregation happens because, compared to EPS forecast accuracy, revenue forecast accuracy is less adversely affected by poor reporting quality. Consequently, when reporting quality is low, investors rely more on revenue than EPS estimates in their investment decisions. Empirical tests confirm that analysts are more likely to supplement earnings forecasts with revenue estimates when firm reporting quality is poor. Further, we show that accuracy of EPS estimates, but not of revenue forecasts, reduces as firm reporting quality deteriorates. Finally, we confirm that the price reaction to EPS forecast revisions is lower for firms with poor reporting quality. However, the price reaction to revenue forecast revisions is unaffected by reporting quality, consistent with higher value-relevance of revenue than earnings forecasts for firms with poor reporting quality.

Keywords: analyst EPS forecasts, revenue forecasts, accruals quality

JEL Classification: M41, N20

Suggested Citation

Bilinski, Pawel and Eames, Michael, The Effect Firm Reporting Quality Has on the Issuance and Properties of Disaggregated Earnings Forecasts (August 2012). Available at SSRN: https://ssrn.com/abstract=1969390 or http://dx.doi.org/10.2139/ssrn.1969390

Pawel Bilinski (Contact Author)

Bayes Business School, City University London ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Michael Eames

Santa Clara University - Accounting ( email )

Santa Clara, CA 95053
United States

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