Analyst earnings forecast revision activity around profit warnings across four European countries. Issue 1 (11th May 2015)

• Record Type: Journal Article
• Authors: Aubert, François; Louhichi, Waël
• Is Part Of: Journal of applied accounting research. Volume 16:Issue 1(2015)
• Page Start: 58
• Page End: 87
• Publication Date: 2015-05-11
• Subjects: Accounting -- Periodicals; Accounting -- Research -- Periodicals; 657.072
• DOI: 10.1108/JAAR-01-2013-0005
• Languages: English
• ISSNs: 0967-5426

Abstract

<abstract> <title> <x content-type="archive" xml:space="preserve">Abstract</x> </title> <sec> <title content-type="abstract-heading">Purpose</title> <p> – The purpose of this paper is to report on research concerning financial analysts' activity surrounding profit warnings issued by listed companies in the four largest European stock exchanges (France, Germany, the Netherlands and the UK). The authors address three aspects of analysts' forecasts: ex-post accuracy of forecasts, earnings forecast revisions, and consensus forecast dispersion. The goal of the analysis is to study the differences between financial analysts' behavior within different regulatory settings, namely common law vs civil law countries. </p> </sec> <sec> <title content-type="abstract-heading">Design/methodology/approach</title> <p> – The sample is composed of 1, 330 profit warnings issued by listed European firms during the period 2000-2010. The authors apply event study methodology and OLS regressions to highlight the impact of the legal information environment on analysts' reactions. </p> </sec> <sec> <title content-type="abstract-heading">Findings</title> <p> – The empirical analysis reveals that analyst activity depends on each country's legal context factors, such as the legal information environment of the firm and the index of investor protection. Accordingly, the authors show that both a richer legal information environment and stronger country-level investor protection substantially improve analyst accuracy around profit warnings. </p> </sec> <sec> <title content-type="abstract-heading">Research limitations/implications</title> <p> – The sample is only composed on firms from four European countries owing to a lack of firms from other European countries that disclosed PW during the period 2000-2010. It would be pertinent to conduct future research dealing with an international sample from different continents. </p> </sec> <sec> <title content-type="abstract-heading">Practical implications</title> <p> – The paper contributes to a deeper understanding of analysts' reactions to profit warnings. The findings can influence firms' reporting practices and lead to future regulation policies. </p> </sec> <sec> <title content-type="abstract-heading">Originality/value</title> <p> – This work is the first to examine the relationship between profit warning releases and the behavior of financial analysts in a pan-European context where there are different institutional levels of investor protection.</p> </sec> </abstract>