The Association between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analysts

45 Pages Posted: 13 Oct 2005

See all articles by Ran Barniv

Ran Barniv

Kent State University - Department of Accounting

Wayne B. Thomas

University of Oklahoma

Mark Myring

Ball State University - Department of Accounting

Abstract

We test the ability of analyst characteristics to explain relative forecast accuracy across legal origins (common law versus civil law). Common law countries generally have more effective corporate governance mechanisms, including stronger investor protection laws and inputs provided through higher-quality financial reporting systems. In this type of environment, investors are more willing to compete for superior investment decisions because they expect to be equitably rewarded, and investors are more likely to demand information about accounting earnings because earnings have more value relevance. The increased demand by investors for earnings information increases the economic incentives of analysts to provide more accurate earnings forecasts. We predict that analysts with superior ability and resources in common law countries will more consistently outperform their peers because appropriate market-based incentives exist. In civil law countries, where the demand for earnings information is reduced because of weaker corporate governance mechanisms and lower-quality financial reporting, we predict that analysts with superior ability will less consistently provide superior forecasts. Results are consistent with our expectations and suggest an association between legal and financial reporting environments and analysts' forecast behavior.

Keywords: Analysts characteristics, relative forecast performance, investor demand, common law, civil law, quality of financial reporting systems, international accounting

JEL Classification: G29, M41, M44, M47

Suggested Citation

Barniv, Ran and Thomas, Wayne B. and Myring, Mark, The Association between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analysts. Contemporary Accounting Research, Vol. 22, No. 4, December 2005, Available at SSRN: https://ssrn.com/abstract=813087

Ran Barniv (Contact Author)

Kent State University - Department of Accounting ( email )

P.O. Box 5190
Kent, OH 44242-0001
United States
330-672-1112 (Phone)
330-672-2548 (Fax)

Wayne B. Thomas

University of Oklahoma ( email )

Michael F. Price College of Business,
307 W Brooks, Rm 212B
Norman, OK 73019
United States
405-325-5789 (Phone)
405-325-7348 (Fax)

Mark Myring

Ball State University - Department of Accounting ( email )

2000 W. University Ave.
Muncie, IN 47306
United States

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