Do Product Market Threats Affect Analyst Forecast Precision?

54 Pages Posted: 20 Apr 2017

See all articles by Marco Maria Mattei

Marco Maria Mattei

University of Bologna - Department of Management; University of Bologna - School of Economics, Management, and Statistics

Petya Platikanova

ESADE - Ramon Llull University

Date Written: April 20, 2017

Abstract

We examine how product market threats influence the precision of financial analyst forecasts. Greater competitive threats may make forecasting more difficult by increasing the uncertainty regarding future cash flows and by influencing the quality of financial disclosure. Using a firm-specific measure of product market threats (product fluidity; Hoberg et al., 2014), we find that analysts are more likely to be less precise forecasting future earnings for highly fluid firms and that the lack of precision is not fully explained by performance volatility. Our findings further suggest that firms with fluid products have lower accruals quality and that they are more likely to withheld information regarding contract terms and sales from major customers. The path analysis confirms the relevance of the information channel in explaining the negative relation between product fluidity and analysts' precision. Cross-sectional analysis further suggests that the effect of product fluidity on analyst forecasts is more pronounced when firms have flexibility in disclosure choices. Using significant changes in tariff rates as a quasi-natural experiment, we find that analyst forecast precision is significantly lower following tariff reductions.

Keywords: security analysts, product market threat, performance volatility, disclosure quality

JEL Classification: G24, G28, M41, L4

Suggested Citation

Mattei, Marco Maria and Platikanova, Petya, Do Product Market Threats Affect Analyst Forecast Precision? (April 20, 2017). Review of Accounting Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2955688

Marco Maria Mattei

University of Bologna - Department of Management ( email )

Via Capo di Lucca, 34
40126 Bologna, 40126
Italy

University of Bologna - School of Economics, Management, and Statistics ( email )

Piazza Scaravilli 1
40126 Bologna, fc 47100
Italy

Petya Platikanova (Contact Author)

ESADE - Ramon Llull University ( email )

Avenguda de Pedralbes 60
Barcelona, 08034
Spain

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