Do Financial Analysts Fully Incorporate the Future Earnings Implications of Really Dirty Surplus into Their Earnings Forecasts?

46 Pages Posted: 14 Jan 2018

See all articles by Thomas D. Dowdell

Thomas D. Dowdell

North Dakota State University

Sangwan Kim

University of Massachusetts Boston

Steve C. Lim

Texas Christian University - M.J. Neeley School of Business

Date Written: November 1, 2017

Abstract

This paper investigates whether sell-side equity analysts fully incorporate the future earnings implications of really dirty surplus (RDS) into their earnings forecasts. RDS refers to gains or losses from contingent equity transactions settled at prices other than the fair value. We find that analysts’ earnings forecasts are over-optimistic for firms with large RDS losses, RDS over-optimism is lower for firms with higher analyst following, and the over-optimism carries over to stock recommendations. Our findings suggest that the lack of fair value information in accounting records about the off-market settlement drives the RDS-related analyst over-optimism.

Suggested Citation

Dowdell, Thomas D. and Kim, Sangwan and Lim, Steve, Do Financial Analysts Fully Incorporate the Future Earnings Implications of Really Dirty Surplus into Their Earnings Forecasts? (November 1, 2017). 2018 Canadian Academic Accounting Association (CAAA) Annual Conference. Available at SSRN: https://ssrn.com/abstract=3101498 or http://dx.doi.org/10.2139/ssrn.3101498

Thomas D. Dowdell

North Dakota State University ( email )

Department of Accounting & Information Systems
Minard Hall
Fargo, ND 58105
United States

Sangwan Kim

University of Massachusetts Boston ( email )

100 Morrissey Blvd.
Boston, MA 02125
United States

Steve Lim (Contact Author)

Texas Christian University - M.J. Neeley School of Business ( email )

2900 Lubbock Street
Fort Worth, TX 76129
United States
817-257-7536 (Phone)

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