Tag Archives: Earnings

Updates from Chicago Booth

Why do analysts low-ball earnings forecasts?
By Martin Daks – The market-research company FactSet reports that for each quarter over the past five years, an average of 72 percent of companies in the S&P 500 beat earnings estimates. Past research, including by University of Pennsylvania’s Scott Richardson, University of California at Irvine’s Siew Hong Teoh, and Boston University’s Peter D. Wysocki has found that analysts’ forecasts become more pessimistic and thus beatable as the quarter end approaches, but an unaddressed question is how this walk-down affects clients. If analysts revise their forecasts downward each quarter to placate managers, wouldn’t this confuse the investors who ultimately pay for their services?

According to Chicago Booth’s Philip G. Berger and Washington University’s Charles G. Ham and Zachary R. Kaplan, analysts walk down forecasts by suppressing positive news from quarterly forecasts, not by issuing misleading negative revisions. When analysts have positive news, they will often revise the share price target upward or state explicitly that they expect companies to beat earnings estimates, while leaving the quarterly forecast unrevised. Suppressing positive news leads to beatable forecasts—behavior that benefits corporate executives but carries important implications for both the individual investors who rely on these predictions and researchers studying investor expectations.

When securities analysts receive updated information after issuing a quarterly forecast, they have three options: revise the current-quarter earnings forecast; issue an alternative forecast signal, such as a revision to the share price target or future-quarter earnings; or issue no additional forecast.

By not disseminating all information through the current-quarter earnings forecast, which is widely available through commercial databases, analysts provide an advantage to investment clients who have paid for access to the full breadth of their research product.

“Analysts convey information in ways that enable them to be of service to clients, who they care about, and, at the same time, to avoid displeasing corporate managers, who they also care about,” Berger says. “Non-clients, who rely on earnings forecasts because they do not have access to the whole of an analysts’ work product, end up with skewed information, but this is not a primary concern for the analysts’ business.”

The researchers demonstrate that a simple strategy based on buying companies expected to beat earnings, using share price target revisions and the text of reports, yields significant abnormal returns, suggesting the market does not see through the analysts’ strategy for conveying information selectively. more>

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Private Companies Will Take Money Public Companies Don’t Want

By Matt Levine – We’re rapidly approaching the point at which big U.S. companies will, collectively, just hand back all the money they make to shareholders.

“Shareholders” here, of course, means mostly “investment professionals”: asset managers and hedge funds and pensions and whatever.

And their reason for demanding capital return has to be something like: “Investment professionals are better than companies are at allocating cash to new ideas.”

Is that correct? I mean, it seems plausible, right? But even if you believe it, you are left with a problem … more> http://tinyurl.com/lruud8l

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Bank of America Made $168 Million Last Quarter, More or Less

By Matt Levine – Bank of America has about $2.1 trillion of assets. So that $168 million of income was 0.008 percent of assets.

How much precision do you think that $168 million number has? Like, if I made $168 million, I would know about it. If you asked me how much money I had in my bank account, I would say “$168 million!” though there would probably be more exclamation points.

Bank of America’s earnings are a rounding error. If Bank of America’s measurement of its revenue was off by one percent, then that would more than wipe out (or double) its net income for the quarter. Is it conceivable that Bank of America’s measurement of its assets could be wrong? more> http://tinyurl.com/l3qazko