Analyst Characteristics, Timing of Forecast Revisions, and Analyst Forecasting Ability

We first examine whether analysts with certain characteristics that prior research has identified are related to superior forecasting ability systematically time their forecast revisions later in the fiscal quarter. We then examine whether this superior ability persists after controlling for this timing advantage by using relative forecast error, a measure that largely eliminates the timing advantage of recent forecasts. Using a sample of quarterly earnings forecast revisions over the 20-year period from 1990 to 2009, we find that analysts with more firm-specific and general experience and more accurate prior-period forecasts, analysts employed by larger brokerage firms, and analysts who follow fewer industries and companies tend to revise forecasts later in the quarter. We also find that analyst characteristics that are positively correlated with revision timing are negatively related to relative forecast errors. These results are consistent with analyst characteristics being useful proxies for analyst forecasting ability and analysts with greater ability revising forecasts later in the quarter

CEO Sensation Seeking and Financial Reporting Quality

This study investigates whether CEOs’ sensation seeking is related to their firms’ financial reporting quality. Consistent with a tendency of sensation seekers to defy ethical rules, we find that firms with sensation-seeking CEOs have lower financial reporting quality and higher likelihood of accounting fraud. More specifically, we find that firms led by sensation-seeking CEOs engage in more accrual-based and real earnings management, have higher information opacity and are more likely to have internal control deficiencies and use less conservative accounting. Firms with sensation-seeking CEOs are also more likely to engage in accounting fraud as indicated by the SEC Accounting and Auditing Enforcement Release (AAER). We further find that good corporate governance does not mitigate the adverse effects of sensation-seeking CEOs on financial reporting quality. Finally, we find a positive association between sensation-seeking CEOs and audit fees. Our results are robust to CEO change, instrument variable method and propensity score matching. In summary, our results suggest that the CEO personality trait of sensation seeking plays an important role in financial reporting quality

Is the mispricing of bank earnings related to financial regulation uncertainty?

We examine the impact of financial regulation uncertainty on the mispricing of earnings in the banking sector. To the extent that the uncertainty generated by the regulatory process can trigger opinion divergence (rational attention), we expect it to delay (accelerate) share price responses to banks’ earnings news. Consistent with the dominance of the opinion divergence effect, we show that such uncertainty is positively associated with banks’ post-earnings announcement drift and this effect is stronger among banks that are more sensitive to financial regulatory uncertainty. Further analyses through analyst forecast error, analyst forecast dispersion, and idiosyncratic return volatility provide corroborative evidence of opinion divergence. Our findings remain consistent after a series of robustness tests. Although financial regulations seek to provide capital market stability, our evidence implies that regulatory uncertainty can invoke negative externalities on market information efficiency

Save money to lose money? Implications of opting out of a voluntary audit review for a firm’s cost of debt

An audit review (AR) is a mechanism used by boards to assess the quality of interim financial reports on a timely basis. In Canada, the AR is voluntary, with listed firms mandated to disclose when they choose to not purchase additional audit verification. Given the relatively low cost of an AR, opting out of it can be regarded as a negative signal, especially in the context of lenders' sensitivity to downside risk. Using a sample of 7,585 firm-year observations from 1,616 public firms in Canada over the period 2004-2015, we document that firms without a voluntary AR have a higher cost of debt than firms with an AR. Furthermore, after firms opt out of the AR, the increase in the cost of debt is accompanied by a rise in discretionary abnormal accruals and managers' stock-based compensation. Moreover, no-AR firms are more likely to reduce post-switch private borrowing and have lower equity analyst following. Our study is the first to document that although listed borrowers that opt out of an AR have a higher cost of debt financing, they are concurrently able to engage in more earnings management and grant their managers higher stock-based compensation because of lower external monitoring

Does Disaster Risk Relate to Banks’ Loan Loss Provisions?

We examine the relation between disaster risk and banks’ loan loss provisions (LLP). We propose a disaster risk measure based on the natural disasters declared as major disasters by the Federal Emergency Management Agency over a 15-year span. We theoretically support and empirically validate our measure using three different approaches, including the UN Sendai Framework for disaster risk reduction, which relates disaster risk to natural hazard exposure, vulnerability and capacity, and hazard characteristics. Using more than 445,000 bank-quarter observations, we document that banks located in U.S. counties with higher disaster risk recognize larger LLP after controlling for other bank-level factors related to LLP. We employ several techniques to ensure the robustness of our findings, including difference-in-differences estimation and matched samples. In additional analysis, we explore the characteristics that better enable banks to recognize disaster risk in their LLP, and investigate the consequences of managing disaster risk through LLP. Our results are important, especially because of the increasing concern about disaster risk and because they inform the growing debate on the economic consequences of disaster risk and the ability of the banking system to proactively manage the resulting credit risk through LLP

International evidence on analyst monitoring and earnings management: The roles of corporate disclosure and national culture

We examine country-level determinants of private information search incentives, and whether analysts ’ role in constraining managers ’ opportunistic earnings management varies across countries. In a sample of 31,312 firm-year observations originating from 30 countries, we document that: (1) analyst coverage is negatively (positively) related to the level of corporate disclosure (how secretive the national culture is); (2) the negative association between analyst coverage and earnings management is observed in stronger investor protection countries but not in weaker investor protection countries; and (3) analyst monitoring fails to mitigate culture-driven earnings manipulations in countries with more individualistic and uncertainty-tolerant cultures. Taken together, financial analysts ’ role in constraining opportunistic earnings management across countries appears to vary with corporate disclosure and cultural environments