How Efficient Is the Market for Australian Firms’ Earnings Information?

Taylor, Stephen L.; Tong, Alex

doi:10.2139/ssrn.3410708

Cited by 1 publication

(2 citation statements)

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“…There has been a growing interest in the economics of the speed construct (Coulton et al , 2016; Taylor and Tong, 2020; Chen et al , 2021). In a recent study by Taylor and Tong (2020), for instance, a new empirical measure is constructed to capture the speed with which sell-side analysts’ forecasts reflect the flow of earnings information to arrive at earnings outcomes. Chen et al (2021) investigate how macro-economic uncertainty resulting from the severity of local COVID-19 spread influences the speed with which managers disclose favorable and unfavorable forecasts.…”

Section: Introductionmentioning

confidence: 99%

“…First, this study paves the way for future research on the relatively unexplored notion of the speed with which managers revise their earnings forecasts to arrive at the actual earnings of their firms. There has been a growing interest in the economics of the speed construct (Coulton et al , 2016; Taylor and Tong, 2020; Chen et al , 2021). In a recent study by Taylor and Tong (2020), for instance, a new empirical measure is constructed to capture the speed with which sell-side analysts’ forecasts reflect the flow of earnings information to arrive at earnings outcomes.…”

Section: Introductionmentioning

confidence: 99%

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The need for speed: an intuitive approach to understanding the relationship between audit quality and management earnings forecasts

Lau

Ota

Wong

2022

MEDAR

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Purpose The purpose of this study is to investigate whether audit quality is associated with the speed with which managers revise earnings forecasts to arrive at the actual earnings through the lens of the auditor selection theory. This study examines this relationship in a unique institutional setting, Japan, where nearly all managers disclose earnings forecasts. Design/methodology/approach The authors pioneer an empirical proxy to capture the speed of management forecast revisions based on well-established principles from the finance and disclosure literatures. This proxy is tested alongside other disclosure proxies (namely, accuracy, frequency and timeliness) to assess the influence of audit quality on managerial forecasting behavior. Findings This empirical analysis shows that forecast revision speed is higher for firms that select higher-quality auditors. While firms that select higher-quality auditors revise forecasts in a more timely fashion, these firms revise less frequently. Moreover, the authors find that the influence of audit quality on forecast revisions is asymmetric. Specifically, the analysis of downward forecast revisions shows that higher-quality auditors are associated with firms that disclose bad news via forecasts revisions faster, more frequently and in a more timely fashion. However, the analysis of upward forecast revisions shows that higher-quality auditors have no effect on the speed with which firms disclose good news via forecast revisions, even though they are associated with less frequent but more timely forecast revisions. These findings have important implications for prior studies that consistently document an asymmetric response of the stock market to good news and bad news. Originality/value The authors provide evidence on the relationship between audit quality and management earnings forecasts using a novel and intuitive measure that captures forecast revision speed. This measure speaks to the growing interest in understanding the notion of speed and timing of voluntary disclosures. This study provides a more robust and comprehensive measure of the speed with which managers revise their earnings forecasts to arrive at the actual earnings. Furthermore, this study is among the first to document an asymmetric effect of audit quality on the type of news disclosed in forecast revisions.

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