Analyst Responsiveness and the Post-Earnings-Announcement Drift

This study investigates the association among readability of analyst reports, stock price and expectations of future earnings. Readability is one important feature of analyst reports that may affect value relevant information. We find that readability reduces analyst dispersion but is not associated with revision news, and stock markets reactions are significantly positive to the issuance of more readable reports. In addition, we document that market reacts positively to the predicted component of forecast dispersion reduction due to report readability. Finally, the positive effect of readability on stock prices is higher when it effectively reduces investors' uncertainty, specifically when the uncertainty is higher, when analysts are more experienced, or when forecasts are issued after earnings announcements. Overall, our empirical findings suggest the linguistic features of analysts' reports reduce uncertainty about future earnings, and investors price that reduction of uncertainty. This is the Pre-Published Version 3

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

Analyst Report Readability, Earnings Uncertainty and Stock Returns

Hsieh

Hui

2012

“…The results are not affected if I simply delete these observations. 16 See Doyle et al (2006) and Zhang (2008). quarters.…”

Section: Test Of the Effect Of Ex-ante Forecast Accuracy On Post-earnmentioning

confidence: 99%

The Effect of Ex-Ante Management Forecast Accuracy on Post-Earnings Announcement Drift*

Zhang

2009

This paper examines the effect of ex-ante management forecast accuracy on post-earnings announcement drift when management forecasts about next quarter's earnings are bundled with the current quarter's earnings announcements. This paper builds a composite measure of ex-ante management forecast accuracy that takes into account forecast ability, forecast difficulty and forecast environment. The results show that the bundled forecasts can mitigate investors' under-reaction to current earnings and reduce the magnitude of postearnings announcement drift only when these forecasts have high ex-ante accuracy.

“…Numerous studies examine components of analyst performance, such as forecast accuracy (Brown et al 1987;Kross et al 1990), forecast dispersion (Hope 2003a), the informativeness of stock recommendations (Palmon and Yezegel 2012) and the responsiveness of analysts to earnings announcements (Zhang 2008;Lehavy et al 2011;Yezegel 2015 (Yezegel 2015). One common type of event that often prompts investors to seek guidance from analysts is the earnings announcement.…”

Section: Analyst Performancementioning

confidence: 99%

“…One common type of event that often prompts investors to seek guidance from analysts is the earnings announcement. Prior research shows that when analysts are more responsive to earnings announcements, the postearnings announcement drift tends to be smaller in magnitude, indicating higher market efficiency (Zhang 2008). However, when accounting complexity is higher, analysts will need to exert more effort and time before issuing their forecasts.…”

Section: Analyst Performancementioning

confidence: 99%

The Effect of Accounting Reporting Complexity on Financial Analysts

Hoitash

Yezegel

2017

We investigate the association between a new XBRL based measure of accounting reporting complexity (ARC) and analyst behavior. We find that analysts are less likely to cover firms with complex accounting. Further, higher ARC is associated with lower forecast accuracy, higher forecast dispersion, and lower informativeness of recommendation revisions and responsiveness to earnings announcements. This association is attenuated when analysts have longer tenure, greater firm-specific experience, and are focused on fewer industries. Investigating several complex accounts, we find that the complexity of derivatives, fair value, and pension accounts are each negatively associated with forecast accuracy, suggesting that understanding these complex accounts requires specialization. We propose a new measure of analysts' account-specific expertise and find that expertise with derivative and fair value accounts attenuates the negative effects of complexity in these accounts to a greater extent than general analyst experience. Overall, our findings suggest that analysts' expertise plays an important role in mitigating the adverse effects of ARC. JEL Classification: G24, G29, M41Keywords: XBRL, accounting complexity, financial analysts' performance, financial analysts' expertise Data Availability: Data are publicly available from sources identified in the paper. 1 The Effect of Accounting Reporting Complexity on Financial Analysts I. IntroductionRegulators and standard setters have long recognized that financial reporting has become overly complicated (SEC 2008; FRC 2009). As a result, the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB) undertook several initiatives to understand and simplify the financial reports (e.g. SEC 2008; FASB 2016). In this study, we examine how accounting reporting complexity (hereafter, ARC), measured as the count of accounting items disclosed in eXtensible Business Reporting Language (XBRL) 10-K filings, is associated with financial analysts' performance and coverage decisions. Since each accounting item is based on authoritative standards and regulations, understanding the financial reports of firms with higher ARC necessitates broader and more in-depth knowledge of accounting.While Hoitash and Hoitash (2017) find that more accounting disclosure complicates the work of preparers and auditors, it is unclear how disclosure volume will be associated with the work of sophisticated market participants such as financial analysts. Greater volume of accounting disclosures can help analysts understand past performance and generate more accurate forecasts.Indeed, several studies find that more disaggregated disclosures can lead to better analyst performance (Lang and Lundholm 1996;Chen et al. 2015). In contrast, more disclosure requires greater knowledge of accounting rules and regulations on part of financial analysts and a need to collect, analyze, and incorporate more information into their predictions. As a result, ARC may hurt overall analyst perfor...