The Role of Financial Analysts in Stock Market Efficiency with Respect to Annual Earnings and its Cash and Accrual Components

Accounting & Finance, Volume 57, Issue 1 p199-237

55 Pages Posted: 1 Apr 2013 Last revised: 30 Aug 2018

See all articles by Dana Hollie

Dana Hollie

The University of Toledo

Philip B. Shane

College of William & Mary; Monash University; Monash University - Department of Accounting

Qiuhong Zhao

Texas A&M University-Corpus Christi-Department of Accounting

Date Written: March 28, 2015

Abstract

This study examines biases in stock prices and financial analysts' earnings forecasts. These biases take the form of systematic overweighting or underweighting of the persistence characteristics of cash versus accrual earnings components. Our evidence suggests that stock prices tend to overweight and financial analysts tend to underweight these persistence characteristics. Furthermore, we find that analysts' underweighting attenuates stock price overweighting. However, we find little evidence that the overweighting in stock prices attenuates analyst underweighting. This study brings a new perspective to the literature regarding the disciplining role of financial analysts in capital markets.

Keywords: Analyst Forecast, Forecasting Bias, Accrual, Free Cash Flow, Market Efficiency

JEL Classification: G14, M41

Suggested Citation

Hollie, Dana and Shane, Philip B. and Zhao, Qiuhong, The Role of Financial Analysts in Stock Market Efficiency with Respect to Annual Earnings and its Cash and Accrual Components (March 28, 2015). Accounting & Finance, Volume 57, Issue 1 p199-237. Available at SSRN: https://ssrn.com/abstract=2242601 or http://dx.doi.org/10.2139/ssrn.2242601

Dana Hollie

The University of Toledo ( email )

College of Business and Innovation
Stranahan Hall 3046
Toledo, OH 43606
United States

Philip B. Shane (Contact Author)

College of William & Mary ( email )

P.O. Box 8795
Williamsburg, VA 23185
United States

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Monash University - Department of Accounting ( email )

H3.43, Building H, Level 3
Monash University Caulfiled
Melbourne, VIC 3145
Australia

Qiuhong Zhao

Texas A&M University-Corpus Christi-Department of Accounting ( email )

6300 Ocean Dr
Corpus Christi, TX 78412
United States

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