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Overstated Quarterly Earnings and Analysts' Earnings Forecast Revisions *
Author(s) -
Ettredge Michael,
Shane Philip B.,
Smith David B.
Publication year - 1995
Publication title -
decision sciences
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.238
H-Index - 108
eISSN - 1540-5915
pISSN - 0011-7315
DOI - 10.1111/j.1540-5915.1995.tb01575.x
Subject(s) - earnings , accounting , commission , audit , earnings response coefficient , enforcement , economics , business , finance , political science , law
A primary purpose of accounting is to provide information for decision makers. Accounting misstatements may have a detrimental effect on decision making. The Securities and Exchange Commission (SEC) identifies earnings overstatements as being particularly troublesome to users, as indicated by SEC Accounting and Auditing Enforcement Releases' emphasis on earnings' overstatement errors. This research investigates how security analysts' forecast revisions are affected by accounting earnings overstatement errors, which become known only after the analysts released their revised annual earnings forecasts. The paper investigates the clarifying role that additional information plays in analysts' revisions. The results show that analysts draw significantly different conclusions from earnings containing (unknown) overstatement errors than from accurately reported earnings. In essence, the analysts identify some of the overstatement, at least on average, by making an adjustment that effectively ignores 21 percent of the overstatement error.