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Under the assumption that audit quality relates positively to unobservable financial reporting quality, we investigate whether audit quality is associated with the predictability of accounting earnings by focusing on analyst earnings forecast properties. The evidence shows that analysts' earnings forecast accuracy is higher and the forecast dispersion is smaller for firms audited by a Big 5 auditor. We further find that auditor industry specialization is associated with higher forecast accuracy and less forecast dispersion in the non-Big 5 auditor sample but not in the Big 5 auditor sample. Overall, our results suggest that high-quality audit provided by Big 5 auditors and industry specialist non-Big 5 auditors is associated with better forecasting performance by analysts.

To enhance traditional jinancial reporting, academics and policymakers have suggested that jinancial statement users be provided with nonfinan-cia1 performance information that may enhance users' ability to evaluate and predict jinancial performance. This study tests this proposition by examining whether timely nonjinancial pegormance information is a useful predictor of financial performance in the airline industry. From analysts' written pronouncements and jinancial press articles we identifL a number of fundamental metrics, including customer satisfaction, purportedly used by analysts and investors to assess airline performance. We empirically examine these metrics and find that on-time performance, mishandled baggage, ticket oversales, and in-flight service are significantly associated with our proxy for customer satisfaction. Using an instrumental variable for customer satisfaction, we find that customer satisfaction, load factor, market share, and available ton miles are contemporaneously associated with operating income and revenues and that customer satisfaction and available ton miles are contemporaneously associated with expenses. Finally, using one and two months of nonfinancial data, wejind that nonfinancial performance information appears to be useful in predicting quarterly revenues, expenses, and operating income. expressed concern that corporate financial reporting and disclosure are not keeping pace with a dynamic and constantly changing business world. To enhance traditional financial reporting, one consistent suggestion from this group has been to provide financial statement users with nonfinancial performance information that may enhance users' ability to evaluate and predict financial performance. As Birchard (1994) argues, there is a missing link between companies' progress in operating activities and companies' financial results, and this link will come from research that demonstrates that nonfinancial performance variables are indicative of bottom line results. This study contributes to this debate by providing empirical evidence that timely nonfinancial performance information is contemporaneously associated with, and can be useful in predicting, financial performance in the U.S. airline industry.Using analysts' written pronouncements and financial press articles we identify a number of fundamental metrics purportedly used by analysts and investors to assess airline performance. From this search, it appears that fundamental operating metrics such as load factors, market share, and available ton miles differentiate airline performance. While these measures appear to be important indicators of future earnings, customer satisfaction measures such as on-time arrival, mishandled baggage, ticket oversales (i.e., involuntarily "bumped" passengers), in-flight service levels and customer complaints also differentiate future financial performance. ' We develop hypotheses for these metrics based on analysts' and financial press suppositions. The customer satisfaction hypothesis is tested using an ...

Prior research on publicly traded U.S. firms provides evidence that managers engage in classification shifting to opportunistically manage 'core' earnings. We extend this line of research in a broader international setting, by examining (1) whether the level of investor protection affects managers' decisions to engage in classification shifting behavior and (2) whether coverage by financial analysts mitigates this behavior. Based on an international sample of firms from 40 countries, we observe evidence consistent with classification shifting in both strong and weak investor protection countries using four separate measures of investor protection. We then explore the potential monitoring role of financial analysts in mitigating classification shifting. We provide evidence that higher financial analyst following mitigates classification shifting, primarily in weak investor protection countries. Overall, our results provide evidence of classification shifting in a broad international setting and evidence of financial analysts influence in reducing this form of earnings management.