Why Do New Issues and High-Accrual Firms Underperform: The Role of Analysts' Credulity
51 Pages Posted: 21 Jul 2001
Date Written: June 2001
We find that analysts' forecast errors are predicted by past accounting accruals (adjustments to cash flows to obtain reported earnings) among both equity issuers and non-issuers. Analysts are more optimistic for the subsequent four years for issuers reporting higher issue-year accruals. The predictive power is greater for discretionary accruals than non-discretionary accruals, and is independent of the presence of an underwriting affiliation. Predicted forecast errors from accruals partially explain the long-term underperformance of new issuers. The predictability of forecast errors also for non-issuers with high accruals suggests that analysts' credulity about accruals management more generally contributes to market inefficiency.
JEL Classification: M41, G29
Suggested Citation: Suggested Citation