Vadim S. Balashov and Zhanel B. DeVides
This study aims to investigate the behavior of sell-side analysts covering firms that are about to experience breaks in strings of consecutive quarterly earnings increases.
Abstract
Purpose
This study aims to investigate the behavior of sell-side analysts covering firms that are about to experience breaks in strings of consecutive quarterly earnings increases.
Design/methodology/approach
The authors estimate the likelihood of analysts predicting a break by using logit regressions for nearly half a million earnings per share forecasts issued by individual analysts from 1992 to 2017.
Findings
The authors find that analysts can predict breaks in earnings strings by issuing less favorable earnings estimates ahead of a break announcement. The probability of detecting a break is higher for longer and more severe breaks, for more skillful analysts and for firms with richer information environments. The authors find that analysts’ warnings are heeded by investors and result in less severe reactions to break announcements.
Originality/value
Breaks in strings of earnings increases are situations in which information asymmetry exists and could be mitigated by information intermediaries such as sell-side analysts. Therefore, it is important to examine whether analysts have any informational advantages or disadvantages over insiders and institutional investors in the quarters prior to breaks in strings and whether they communicate such information to the market in a timely and accurate manner, thus reducing information asymmetry by “leveling the field” across the investment community.
Details
Keywords
Zhanel DeVides and Hyoseok (David) Hwang
We investigate the information content of legal contingency disclosures in corporate filings, specifically their usefulness in predicting settlement amounts and mitigation of…
Abstract
Purpose
We investigate the information content of legal contingency disclosures in corporate filings, specifically their usefulness in predicting settlement amounts and mitigation of market response to litigation resolution news.
Design/methodology/approach
Using a hand-collected sample of disclosures for settled US securities class action lawsuits, we analyze the contents of the contingent liabilities disclosure before future settlements and classify them into two categories: “pessimistic” and “optimistic” disclosures. We examine whether the tone of disclosure is associated with litigation outcomes, such as settlement amounts and likelihood of incurring material losses, and its effect on market reaction to settlement announcements.
Findings
Disclosures with optimistic views on lawsuits are settled for lower amounts, whereas those with more pessimistic views result in higher settlements. Furthermore, while, on average, investors react negatively to litigation resolutions, the market reaction is attenuated (exacerbated) when a prior legal liability disclosure was pessimistic (optimistic). Additionally, investors value disclosure consistency when a litigation outcome is aligned with its legal contingency disclosure. Finally, disclosure consistency is positively associated with managerial ownership as well as the largest shareholder ownership.
Originality/value
This study highlights that the overall tone in legal contingency disclosures is informative and has valuation implications for capital markets. It also highlights the benefits of consistent disclosure, i.e. litigation disclosure aligned with litigation outcomes, as it is viewed positively by investors.