Why Do New Issues and High-Accrual Firms Underperform: The Role of Analysts' Credulity

51 Pages Posted: 21 Jul 2001

See all articles by Siew Hong Teoh

Siew Hong Teoh

UCLA Anderson School of Management

T.J. Wong

University of Sothern California

Multiple version iconThere are 2 versions of this paper

Date Written: June 2001

Abstract

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

Teoh, Siew Hong and Wong, T.J., Why Do New Issues and High-Accrual Firms Underperform: The Role of Analysts' Credulity (June 2001). Available at SSRN: https://ssrn.com/abstract=276628 or http://dx.doi.org/10.2139/ssrn.276628

Siew Hong Teoh

UCLA Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

HOME PAGE: http://www.anderson.ucla.edu/faculty-and-research/accounting/faculty/teoh

T.J. Wong (Contact Author)

University of Sothern California ( email )

701 Exposition Blvd
Los Angeles, CA California 90089
United States

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