I/B/E/S Reported Actual EPS and Analysts Inferred Actual EPS

Lawrence D. Brown Temple University ldbrown@temple.edu

Stephannie Larocque University of Notre Dame larocque.1@nd.edu

Forthcoming in The Accounting Review

December 1, 2012

We thank Brad Badertscher, Rajiv Banker, Sudipta Basu, Jeff Burks, William Buslepp, Angie Davis, Gus De Franco, Peter Easton, Harry Evans (the Editor), Tom Frecka, Yu Gao, Leo Guo, Mo Khan, Jevons Lee, Greg McPhee, Jeff Miller, Ken Njoroge, Kyle Peterson, Eric Press, Jom Ruangprapun, Phil Shane, Pervin Shroff, and Ling Zhou, two anonymous reviewers, and seminar participants at the 2012 Financial Accounting and Reporting Section Meeting (Chicago), the 2011 AAA Annual Meeting (Denver), Temple University, Tulane University, University of Minnesota, University of Notre Dame, University of Oregon, and Washington University (St. Louis) for their helpful comments and suggestions. We gratefully acknowledge Thomson Reuters for providing I/B/E/S analyst earnings forecast data. Any errors remain our responsibility.

Electronic copy available at: http://ssrn.com/abstract=1732573

I/B/E/S Reported Actual EPS and Analysts Inferred Actual EPS Abstract

Users of I/B/E/S data generally act as if I/B/E/S reported actual earnings represent the earnings analysts were forecasting when they issued their earnings estimates. For example, when assessing analyst forecast accuracy, users of I/B/E/S data compare analysts forecasts of EPS with I/B/E/S reported actual EPS. I/B/E/S states that it calculates actuals using a majority rule indicating that its actuals often do not represent the earnings that all individual analysts were forecasting. We introduce a method for measuring analyst inferred actuals, and we assess how often I/B/E/S actuals do not represent analyst inferred actuals. We find that I/B/E/S reported Q1 actual EPS differs from analyst inferred actual Q1 EPS by at least one penny 39 percent of the time during our sample period, 36.5 percent of the time when only one analyst follows the firm (and hence this consensus forecast is based on the majority rule), and 50 percent of the time during the last three years of our sample period. We document two adverse consequences of this phenomenon. First, studies failing to recognize that I/B/E/S EPS actuals often differ from analyst inferred actuals are likely to obtain less accurate analyst earnings forecasts, smaller analyst earnings forecast revisions conditional on earnings surprises, greater analyst forecast dispersion, and smaller market reaction to earnings surprises than do studies adjusting for these differences. Second, studies failing to recognize that I/B/E/S EPS actuals often differ from analyst inferred actuals may make erroneous inferences.

Keywords: I/B/E/S reported actual EPS, analyst inferred actual EPS, accuracy, revisions, dispersion, and surprises.

Electronic copy available at: http://ssrn.com/abstract=1732573

I/B/E/S Reported Actual EPS and Analysts Inferred Actual EPS I. Introduction Many studies use actual EPS figures reported by I/B/E/S when examining analyst forecast accuracy, analyst forecast revisions conditional on observing earnings surprises, and the capital market reaction to earnings surprises.1 Researchers conducting these studies implicitly assume that I/B/E/S reported actual earnings represent the earnings forecasted by individual analysts when they issued their earnings estimates. I/B/E/S uses the majority rule so its single reported actual for a given firm-time period does not always represent the earnings numbers that all analysts were forecasting for all firm-time periods. Our study is the first to examine how often I/B/E/S reported actuals do not represent earnings numbers that individual analysts were forecasting and how ignoring this difference (hereafter DIFF phenomenon) impacts the results of studies. We conduct our examinations by introducing a method to infer the earnings that individual analysts were forecasting for a given firm-time period (hereafter the analysts inferred actuals) which we illustrate with the following example. Firm j reports its first quarter EPS for fiscal year 2005 at 10 AM on April 12th. I/B/E/S reports firm js actual first quarter EPS as $0.25 at 11 AM on April 12th. Analysts A and B issued forecasts of firm js second, third and fourth quarter earnings of 2005, and its annual earnings for 2005 at noon on April 14th. More specifically, (1) Both analysts forecasted EPS of $0.25 for Q2, $0.25 for Q3, $0.25 for Q4. (2) Analyst A forecasted $1.00 for the full fiscal year.
1

See Ramnath, Rock, and Shane (2008) for summaries of studies published after 1990, and Brown (2007) for abstracts of articles using analyst earnings data. For a recent article in each area, see Ertimur, Sunder, and Sunder (2007) for accuracy, Gleason and Lee (2003) for revision, and Hugon and Muslu (2010) for market reaction to earnings surprise.

(3) Analyst B forecasted EPS of $1.05 for the full fiscal year. To determine if the I/B/E/S Q1 actual EPS represents analyst As (Bs) inferred Q1 EPS, we compare analyst As (Bs) forecast for the fiscal year with the sum of the analysts forecast for the remainder of the year and the I/B/E/S Q1 actual EPS. The numbers do add up for analyst A (i.e., the $1.00 forecast for the full fiscal year equals the sum of analyst As forecast of $0.75 for the remainder of the year and the I/B/E/S Q1 actual EPS of $0.25) but the numbers do not add up for analyst B (i.e., analyst Bs $1.05 forecast for the full fiscal year is five cents greater than the sum of his forecast of $0.75 for the remainder of the year and the I/B/E/S Q1 actual EPS of $0.25). Thus, we infer that analyst A was aiming at the same target that I/B/E/S reported as the Q1 actual but that analyst B was aiming at a different target than the one I/B/E/S reported as the Q1 actual. We measure analyst As inferred Q1 EPS as $0.25, and analyst Bs inferred Q1 EPS as $0.30.2 Our primary analysis uses a simple algorithm. If the absolute value of the difference between the I/B/E/S reported actual EPS and the analysts inferred actual EPS is at least one cent, we say that the DIFF phenomenon exists and we set DIFF = 1. Otherwise, we say that the DIFF phenomenon does not exist and we set DIFF = 0. We find that DIFF = 1 for Q1 EPS 39 percent of the time during our 13 year sample period, 1996-2008, and 50 percent of the time for the last three years of our sample period, 2006-2008. We also find that DIFF = 1 36.5 percent of the time when a single analyst follows a given firm in a given year. Because this sole forecast is the mean, median and modal consensus forecast, our evidence suggests: (1) I/B/E/S actuals often are not based on a
2

According to an I/B/E/S official, I/B/E/S applies a 4 leverage policy, such that it includes brokers annual estimates provided that the sum of the quarterly EPS estimates are within $0.04 of the brokers annual EPS estimate. In our sample, we find that 88 percent of analysts fiscal-year estimates are within |$0.04| of the I/B/E/S Q1 actual plus their forecast for the remainder of the year.

majority rule, and (2) the DIFF phenomenon applies to consensus forecasts as well as individual forecasts.3 We show that the DIFF phenomenon is more likely to pertain to analysts with certain characteristics that the literature has shown to describe inaccurate analysts, namely analysts who forecast infrequently, follow many firms, and are employed by smaller brokerage houses. We also show that the DIFF phenomenon is more likely to pertain both to firms reporting non-operating or extraordinary items and those followed by more analysts; for the three industries, energy, transportation and utilities; and for the most recent years. We show that studies ignoring the DIFF phenomenon are likely to underestimate analyst forecast accuracy, analyst earnings forecast revisions conditional on earnings surprises, and market reactions to earnings surprises, and to overestimate analyst dispersion. We provide three ways for researchers to mitigate the measurement error problems associated with the DIFF phenomenon, and we provide an example of how a recent study may have reached some different inferences if it had omitted observations where DIFF = 1. We present our research questions in section II. We discuss our sample selection procedures and report the prevalence of DIFF = 1 in section III. We examine factors associated with the DIFF phenomenon and the adverse consequences of not controlling for it in sections IV and V, respectively. We provide a replication of prior research in section VI, robustness tests in section VII, and conclusions in section VIII. Appendix 1 contains definitions of variables used in our study. Appendix 2 provides additional insight on how we estimate the DIFF phenomenon.

We focus on individual analyst forecasts throughout the study. Nonetheless, in untabulated results, we find that DIFF = 1 two-thirds of the time for the median consensus forecast so the DIFF phenomenon applies to the consensus as well as to individual forecasts.

II.

Research questions Because we are the first to identify the DIFF phenomenon, we examine the extent to

which researchers should be concerned about it. We first examine its prevalence. If the DIFF phenomenon occurs rarely, it is of little concern to researchers. We find that it occurs often. Second, we examine if its occurrence is random or systematic. If its occurrence is systematic, it is more likely to impact the results of studies whose samples are heavily weighted in the systematic factors. We show that it the DIFF phenomenon is systematic. Third, we examine the magnitude of the adverse consequences to results of studies that ignore it. If the magnitudes of the coefficients of studies that ignore it are not materially affected, researchers failure to consider it is of little consequence. We find that the coefficients of studies failing to control for the DIFF phenomenon are materially affected both statistically and economically. Fourth, we examine if there are ways to mitigate its adverse effects. If it is possible to mitigate its adverse effects, researchers should attempt to do so. We identify three ways to mitigate the DIFF phenomenons adverse effects, enabling researchers to conduct studies with more reliable coefficient estimates. Finally, we examine whether a published study may have reached different conclusions if it excluded observations where DIFF = 1. Failure to find such a study suggests that attempting to mitigate the effects of the DIFF phenomenon may not be important. We identify a published study subject to one of the systematic factors related to the DIFF phenomenon, the temporal effect, and show that the temporal result described by the researchers may have been an artifact of increased temporal prevalence of the DIFF phenomenon. In order to determine whether the Q1 I/B/E/S actual EPS differs from the analysts inferred Q1 EPS, we compare Q1 I/B/E/S actual EPS to the inferred Q1 analyst EPS for all

analysts in the I/B/E/S database possessing requisite information. Prior to the Q1 earnings announcement, an analyst forecasts earnings of Q1 and FY (the fiscal year).4 After Q1 earnings are announced, the same analyst forecasts earnings of Q2, Q3, Q4, and FY. We refer to the analysts forecasts prior to (after) the Q1 earnings announcement as the first (second) forecast, and we measure the inferred Q1 EPS by subtracting the summation of the second forecast of Q2, Q3, and Q4 earnings from the second forecast of FY earnings. Our first task is to determine how often DIFF = 1. Our first research question (RQ1) is:

RQ1: How often does the DIFF phenomenon occur?

After providing evidence that the frequency of DIFF = 15 is pervasive in our sample, we investigate if the DIFF phenomenon is random or systematic. We consider four possible factors that DIFF = 1 may be related to: analyst effects, firm effects, industry effects, and year (temporal) effects. Our second research question is:

RQ2: Is the frequency of the DIFF phenomenon systematically related to analyst, firm, industry and/or year fixed effects?
After showing that the frequency of the DIFF phenomenon is related to all four fixed effects, we examine the severity of the consequences to the results of four common types of studies which ignore the DIFF phenomenon.6 Our third research question is:

Prior to the Q1 earnings announcement, analysts may forecast earnings for other periods but we require only their forecasts of Q1 and the fiscal year (FY). Our method does not pertain to longer-term earnings forecasts such as long-term growth forecasts. 5 When we examine individual analysts, the term DIFF = 1 refers to all analyst-firm-years whose inferred Q1 differs from the I/B/E/S Q1 actual by at least one penny. When we examine firms, the term DIFF = 1 refers to all firms followed by at least one analyst whose inferred Q1 differs from the I/B/E/S Q1 actual by at least one penny. 6 We do not query whether any effects exist because DIFF = 1 guarantees that earnings forecast accuracy (i.e., adding measurement error reduces unsigned earnings forecast accuracy), earnings forecast revision coefficients and market reaction to earnings surprise coefficients are affected (i.e., adding measurement error to an independent variable mitigates the magnitude of the variabl es coefficient estimate). Our task is to explore the economic significance of DIFF = 1s adverse effects. For simplicity, we only consider the

RQ3: For studies of forecast accuracy, forecast revision, forecast dispersion, and the market reaction to earnings surprises, what are the consequences to researchers of ignoring the DIFF phenomenon?
We find that ignoring the DIFF phenomenon has a material effect on the magnitudes of coefficients of the four types of studies delineated in RQ3. We next examine if it is possible to mitigate its adverse effects. Our fourth research question is:

RQ4: Can researchers mitigate the adverse effects of the DIFF phenomenon to provide more reliable estimates of their variables of interest for studies of earnings forecast accuracy, earnings forecast revision, earnings forecast dispersion, and the market reaction to earnings surprises?
We provide three ways for researchers to mitigate the DIFF phenomenons adverse effects. We next examine if an extant study may have arrived at some different inferences if it had omitted observations where the DIFF phenomenon exists. Our final research question is:

RQ5: Would some inferences in the extant literature possibly differ if researchers omitted observations where the DIFF phenomenon exists?
We discuss a published study that may have reached some different inferences if it omitted observations subject to the DIFF phenomenon. III. Sample selection and evidence regarding the prevalence of DIFF = 1 We extract from the I/B/E/S earnings detail file 74,009 U.S. firm-years with available reporting dates for fiscal year t-1 (FYt-1) and the first and second quarters of fiscal year t (Q1t and Q2t) for the 13 years, 1996 to 2008. Consistent with Payne and Thomas (2003) we use

direct effects of the DIFF phenomenon. We do not consider its indirect effects on studies whose focus is on variables that do not incorporate I/B/E/S actual EPS but which include these data in their control variables.

unadjusted I/B/E/S data.7 We require reporting dates for FYt-1, Q1t, and Q2t because we examine analyst forecasts made: (1) after the year t-1 report but before the first quarter of year t report; and (2) after the first quarter of year t report but before the second quarter of year t report. We delete 7,858 firm-years for which we cannot obtain actual earnings from I/B/E/S for FYt (EPSt (FYt)) and for Q1t (EPSt (Q1t)), leaving us with 66,151 firm-years.8 We also delete 5,470 firm-years without share prices as of the end of year t-1 available from CRSP, resulting in 60,681 firm-years. For these 60,681 firm-years, we search the I/B/E/S detail file for analysts who, no earlier than the day following the firms release of Q1t earnings, issued EPS forecasts for Q2t, Q3t, Q4t, and FYt on the same day. We do not take into account announcement times in selecting the sample. We limit the sample to the 32,019 analyst-firm-year observations where analysts issued a Q1t forecast after the release of FYt-1 earnings but before the release of Q1t earnings. We use these 32,019 analyst-firm-years to examine the influence of the DIFF phenomenon on analyst forecast accuracy of Q1t earnings.9 36 percent (64 percent) of analyst-firm-years are followed by only (more than) one analyst. Figure 1 presents an example of the timeline used to select our sample. [INSERT FIGURE 1 HERE] We form four sub-samples from the 32,019 analyst-firm-years to examine the impact of the DIFF phenomenon on: (1) analyst forecast accuracy of FYt (24,427 analystfirm-years with FYt forecasts made after the release of FYt-1 earnings but before the release
7

In untabulated results, we omit observations with either stock splits or stock distributions between when analysts made their forecasts and the firm announced its earnings. The results, available on request, are similar to those reported herein. 8 We require the reporting dates for year t-1 and the second quarter of year t but we do not require the actual earnings numbers for these dates. 9 These data are used in panels B, C and D of Table 3 (see Section IV). The other panel of Table 3 and subsequent tables use smaller sample sizes as the tests have additional data restrictions.

of Q1t earnings); (2) analyst earnings forecast revisions of Q2-Q4 (21,197 analyst-firm-years with Q2t, Q3t, and Q4t forecasts made after release of FYt-1 earnings but before the release of Q1t earnings); (3) analyst forecast dispersion in Q1t (FYt) earnings forecasts (7,152 (5,169)) firm-years with multiple analysts following the firm); and (4) capital market reaction to Q1 earnings surprises (18,533 firm-years with non-missing CRSP stock return data). Table 1 outlines our sample selection method. [INSERT TABLE 1 HERE] We examine analysts annual earnings forecasts made after Q1 earnings are known. In untabulated results, we find DIFF equals 1 for 12,530 or 39 percent of the analyst-firmyears. Figure 2 presents the distribution of the difference between the analysts inferred Q1 EPS and the I/B/E/S Q1 actual. The median difference of 0.00 and the mean difference of -0.003 are insignificantly different from zero, indicating that we cannot reject the null hypothesis that, on average, I/B/E/S reported Q1 EPS reliably estimate analysts inferred Q1 EPS. The standard deviation of the distribution is 0.250, revealing that the I/B/E/S actual differs from the analysts inferred actual by less than the absolute value of one-half cent approximately 95 percent of the time (i.e., two standard deviations on either side of the mean). Skewness is +73.778, indicating that the distribution of the difference between the analysts inferred Q1 EPS and the I/B/E/S Q1 actual is skewed right. Kurtosis is +9,570, indicating that the distribution is leptokurtic (i.e., it has fat tails). [INSERT FIGURE 2 HERE] IV. Factors associated with the DIFF phenomenon In order to determine if the DIFF phenomenon is systematic or random, we estimate the following fixed effects model using the logistic regression:

DIFFijkt = i + j + k + t + ijkt

(1)

We consider four factors: (1) analyst effects (i), (2) firm effects (j), (3) industry effects (k), and (4) year effects (t). The dependent variable, DIFFijkt equals 0 when analyst i following firm j in I/B/E/S industry k in year t makes an annual earnings forecast for year t after the release of Q1 EPS that is within one penny of the sum of the I/B/E/S Q1 actual EPS and the analysts EPS forecast of the remainder of year t and 1 otherwise. The model residual is represented by ijkt. Following OBrien (1990), we estimate separate fixed effects models where each model estimates only one fixed effect.10 Following Hamilton (1992), we evaluate the log-likelihood of each logistic model to determine if the fixed effect helps explain the probability that DIFF = 1. Our estimations require multiple observations of: (1) analysts for the analyst model; (2) firms for the firm model; (3) industries for the industry model; and (4) years for the year model. Table 2 presents the results. Table 2 indicates that the log-likelihood ratio is 7,723.511 when we include only analyst fixed effects,-10,335.4 when we include only firm fixed effects, -19,025.0 when we include only industry fixed effects, and -19,097.2 when we include only year fixed effects. The log-likelihood ratio is -2,835.7 when we include all four fixed effects. In sum, the DIFF phenomenon is systematically associated with analyst, firm, industry, and year effects. [INSERT TABLE 2 HERE] To learn more about these fixed effects, we investigate each one separately. Panel A of Table 3 presents the association of DIFF with five analyst-level variables commonly used
10

OBrien (1990) considered analyst effects, firm effects, and year effe cts. We extend her analysis by adding industry effects. 11 The 2 for each model is significant at the 0.00 level.

in the literature (Mikhail, Walther, and Willis 1997; Clement 1999; Jacob, Lys, and Neale 1999; Clement and Tse 2005), namely firm experience (FEXP), forecast frequency (FREQ), number of firms covered (NFIRMS), brokerage size (BSIZE), and forecast horizon (HORIZON). Our results reveal that the DIFF phenomenon is least likely to pertain to analysts who work for larger brokerage houses, forecast more frequently, and follow fewer firms.12 Panel B shows that the frequency of DIFF increases monotonically as the number of analysts following the firm increases, ranging from 36.5 percent when one analyst follows the firm to 44.8 percent when five or more analysts follow the firm.13 We examine a second firm effect in untabulated analysis: the presence or absence of non-operating or extraordinary items. We test the correlation between DIFF and NONOP (NONOP = 1 when the absolute value of the difference between Q1 Compustat operating earnings and Q1 Compustat earnings after extraordinary items is one penny or more and 0 otherwise). The correlation is positive and significant (0.056, p < 0.001), suggesting that firms reporting Q1 EPS with non-operating or extraordinary items are more likely to be subject to the DIFF phenomenon, and that some analysts following firms with such transitory earnings items aim at a different earnings target than the earnings reported as the I/B/E/S actual.14 Panel C provides pooled descriptive statistics on the frequency of DIFF = 1 for each of the 11 industries (industry definitions obtained from I/B/E/S): Basic Industries (Basic), Capital Goods (Capital), Consumer Durables (ConsDur), Consumer Non-Durables

12

Our brokerage house result is consistent with Ljungqvist et al. (2009), who find that changes to the I/B/E/S database of analyst recommendations occur more often for relatively larger brokerage houses. 13 It is logical that as the number of analysts following a firm increases, it is more likely that at least one analyst aims at a different earnings target than the other analysts. 14 It is intuitively appealing that firms reporting non-operating or extraordinary items have an increased probability that at least one analyst is aiming at a different earnings target than other analysts (e.g., some analysts may consider the non-reporting items as transitory and ignore them; other analysts may consider the non-reporting items as recurring and include them).

10

(ConsNonDur), Consumer Services (ConsSvc), Energy (Energy), Finance (Finance), Health Care (Health), Technology (Technol), Transportation (Transp), and Public Utilities (Utility). The frequency with which DIFF = 1 ranges from around 32 percent for the capital goods industry to 45 percent or more for the utility, transportation, and energy industries.15 Panel D examines year effects by estimating the following specification for the full sample of 32,019 observations: Pr(DIFFijkt =1) = a + b * Yeart + eijkt (2)

To facilitate interpretation of our results, we set the first year of our sample (1996) equal to one, the second year equal to two, and so on. Our results reveal that the frequency of DIFF = 1 in the I/B/E/S earnings data base has increased dramatically over time. Untabulated results reveal that DIFF = 1 50 percent of the time in the last three years of our sample (2006-2008).16 [INSERT TABLE 3 HERE] In sum, the DIFF phenomenon arises more often for: (1) analysts who forecast infrequently, follow more firms, and are employed by smaller brokerage houses; (2) firms with non-operating or extraordinary items and those with greater analyst following; (3) the energy, transportation and utility industries; and (4) in more recent years.

15

We investigate why the DIFF phenomenon is more pronounced in these industries. We find that, relative to the ten other industries in our sample, the energy industry has the highest analyst following and the utility industry has the highest overall percentage of non-operating earnings and extraordinary items. 16 This temporal increase is not surprising given the increased temporal prevalence of non-operating and extraordinary items. During our 1996-2008 sample period, non-operating and extraordinary items increased from 22 percent (in 1996) to 41 percent (in 2008) of firms. To ascertain whether the increase in DIFF over time is due entirely to an increased prevalence of non-operating and extraordinary items, we re-estimate equation (2) excluding firms with earnings that contain extraordinary items. We obtain similar inferences suggesting the temporal effect is incremental to the non-operating and extraordinary item effects.

11

V.

Adverse consequences of the DIFF phenomenon In the following analyses, we provide univariate results for the full sample, the DIFF

= 0 and DIFF = 1 sub-samples, and the difference between these sub-samples. In multivariate analyses, we document the severity of the consequences for studies of forecast accuracy, forecast revision, forecast dispersion, and market reaction to earnings surprise which ignore the DIFF phenomenon. To mitigate the impact of outliers, we winsorize the distributions of accuracy, revisions, and earnings forecasts in the dispersion analysis, and the distribution of earnings surprises in the top and bottom 1 percent of observations. Earnings forecast accuracy Table 4 presents separate results for modeling the accuracy of analysts forecasts of both first-quarter and annual EPS. For brevity, we only discuss first-quarter results in the text, but inferences are similar for the annual results. We define Accuracyijkt as the absolute value of the difference between I/B/E/S actual earnings and analyst is last EPS estimate for firm j in industry k during year t before the release of Q1 EPS, scaled by lagged stock price (i.e., stock price as of the end of fiscal year t-1) so that a smaller value indicates greater accuracy. We expect analyst forecast accuracy to be lower when the DIFF phenomenon exists. Panel A presents pooled accuracy results for the full sample. Earnings forecast accuracy averages 0.0042 across all analyst-firm-years, averaging 0.0037 and 0.0049 for the DIFF = 0 and DIFF = 1 analyst-firm-years, respectively. The order of magnitude of unsigned error for DIFF = 1 is nearly one-third larger than when DIFF = 0. This magnitude is both economically meaningful and statistically significant (t-statistic = 13.65). [INSERT TABLE 4 HERE]

12

Panel B provides results of a multivariate analysis to examine the relation between forecast accuracy and the DIFF phenomenon based on the following model: Accuracyijkt = 0 + 1 DIFFijkt + 2FEXPijkt + 3FREQijkt + 4NFIRMSijkt + 5BSIZEijkt + 6HORIZONijkt + 7NONOPjkt + i + j + k + t + eijkt We control for five analyst effects: firm experience (FEXP), forecast frequency (FREQ), number of firms followed (NFIRMS), brokerage size (BSIZE), and forecast horizon (HORIZON). We also control for instances where firms have non-operating or extraordinary items on their income statements (NONOP) along with analyst, firm, industry, and year fixed effects. Based on prior research (Mikhail et al. 1997; Clement 1999; Jacob et al. 1999; Clement and Tse 2005), we expect analysts who are more experienced, forecast more often, and work for larger brokerage houses to be more accurate, and analysts who follow more firms, make forecasts over longer time horizons, and forecast firms reporting non-operating or extraordinary items to be less accurate. Most of the coefficients on the control variables have their expected signs. The main difference between our result and findings of the extant literature (Mikhail et al. 1997; Clement 1999; Jacob et al. 1999; Clement and Tse 2005) is that we find firm experience to be positive.17 Consistent with our findings in the univariate analyses, the DIFF phenomenon is associated with significantly less accurate forecasts. To assess the economic meaning of our results, we compare the coefficient on DIFF (1) with the intercept (0), which represents the accuracy of analysts with inferred Q1 EPS within one penny of the I/B/E/S Q1 actual EPS after controlling for the other factors in the model. Analysts one-quarter-ahead forecasts
17

(3)

Untabulated results reveal that the coefficient on firm experience is positive and significant in a minority of years in our sample so we do not consider the anomalous finding regarding firm experience to be very reliable.

13

are only one-half as accurate when DIFF = 1 versus when DIFF = 0, and DIFFs coefficient of 0.0004 is identical to that of NONOP, the other indicator variable.18 Earnings forecast revisions Table 5 presents results relating to the revision of analysts EPS forecasts for the last nine months of the fiscal year after the Q1 EPS is reported. Panel A estimates the following equation: REV_9Mijkt = a + b * SURPijkt + eijkt (4)

The dependent variable represents the revision of analyst is EPS estimate for firm j for Q2 through Q4 in industry k in year t, defined as the difference between the analysts first forecast of Q2 through Q4 issued after the release of Q1 earnings but before the release of Q2 earnings and the same analysts last forecast of Q2 through Q4 earnings issued after the release of year t-1 earnings but before the release of Q1 earnings, scaled by lagged stock price. SURPijkt is defined as the difference between the I/B/E/S actual Q1 earnings and the last Q1 forecast issued by analyst i before the release of Q1 earnings, scaled by lagged stock price. We expect the beta coefficient for the DIFF = 0 sub-sample to be higher than the beta coefficient for the DIFF = 1 sub-sample because measurement error in SURP reduces the magnitude of the coefficient towards zero. Table 5 Panel A presents pooled revision results for the sub-sample of 21,197 analyst-firm-years with forecasts of Q1, Q2, Q3, and Q4 EPS made by the same analyst on the same day both after the release of FYt-1 earnings but before the release of Q1 earnings, and after the release of Q1 earnings. The revision slope coefficient of 0.91 for all analyst-

18

The ratio of accuracy when DIFF = 1 versus 0 equals 2 [(0.0004+0.0004)/0.0004], indicating that the former is only one-half as accurate as the latter.

14

firm-years reveals that for every $1.00 of SURP for Q1, on average, analysts revise their EPS forecasts of the remainder of the year in the same direction as the surprise by $0.91 (tstatistic = 56.43).19 As in Table 4, we partition our sample into DIFF = 0 and DIFF = 1. The forecast revision coefficient for the DIFF = 0 sub-sample is significantly larger than for the DIFF = 1 sub-sample (1.09 versus 0.75, t-statistic of the difference = -10.70). In other words, for each dollar of SURP in Q1, analysts revise their EPS forecasts for the remainder of the year by an average of $1.09 (t-statistic = 50.15) when DIFF = 0. In contrast, when DIFF = 1, for each dollar of SURP in Q1, analysts revise their EPS forecasts for the remainder of the year by an average of only $0.75 (t-statistic = 31.18). The revision coefficient is 46 percent higher when the DIFF phenomenon does not exist than when it does exist, a magnitude which is both economically relevant and statistically significant (t-statistic = -10.70). [INSERT TABLE 5 HERE] Panel B provides results which control for NONOP along with analyst, firm, industry, and year fixed effects. More specifically, we estimate the following model: REV_9Mijkt = 0 + 1 DIFFijkt + 2SURPijkt + 3 DIFFijkt * SURPijkt + 4NONOPjkt + i + j + k + t + eijkt We have no priors regarding DIFFs main effect (1). Given that analysts revise their forecasts of future quarters in the direction of their most recent forecast errors (Brown and Rozeff 1979), we expect analyst forecast revisions to be positively related to SURP (2). We expect the revision coefficient on SURP to be smaller when DIFF = 1 than when DIFF = 0 (3) because SURP measures the analysts inferred earnings surprise with error when DIFF = 1. As (5)

19

For simplicity, we use the term analyst-firm-year in lieu of the more correct but more cumbersome analyst-firm-industry-year both in the text and the tables.

15

non-operating and extraordinary items are more transitory than operating earnings (Elliott and Hanna 1996), we expect analysts to revise their forecasts of future earnings to a lesser extent conditional on SURP when it contains a non-operating or extraordinary item component (4). The main effect of DIFF is small in magnitude and statistically insignificant (coefficient = 0.0002, t-value = 0.87). As expected, the coefficient on SURP is positive and significant (0.8636, t-value = 31.26). Most importantly for our purposes, the coefficient on DIFF * SURP is negative and significant (-0.3256, t-value = -8.44). Thus, when the DIFF phenomenon is absent, analysts revise their earnings forecasts for the remainder of the year 61 percent more than when the DIFF phenomenon is present, a magnitude which is both statistically and economically relevant.20, 21 Earnings forecast dispersion Table 6 presents results for the dispersion of analysts first-quarter and annual EPS estimates. For brevity, we only discuss the first-quarter results in the text but the annual results are qualitatively similar. We expect mean dispersion to be smaller when all the analysts are shooting at the earnings target that I/B/E/S reports as its actual (DIFF = 0). Panel A presents estimates of dispersion as a pooled average of the standard deviation of analysts EPS estimates for each firm j in industry k with multiple analyst following in a given quarter of year t. Mean dispersion (STD (Q1))jkt for these 7,152 firm-years is 0.0463. Mean dispersion is 0.0445 for firm-years with DIFF = 0 and 0.0569 for firm-years with DIFF = 1.
20

61 percent equals 0.8636/ (0.8636-0.3256). If analysts learn over time, it is possible that our revision tests are affected by changing expectations relative to when the I/B/E/S actual earnings number is issued. To address this concern, we re-estimate equation (5) using the sample of analyst-firm-years that issue revisions nearer to and further from the earnings announcement date. We obtain similar inferences in both subsamples. 21 In untabulated results, we add DIFF * NONOP to equation 5 and obtain qualitatively similar significant coefficients for SURP and DIFF * SURP.

16

Thus, mean dispersion is 28 percent greater than for firm-years with DIFF = 1 than with DIFF = 0.22 [INSERT TABLE 6 HERE] Panel B presents results which control for firms earnings stability (STABLE), NONOP, and fixed effects for firm, industry and year. More specifically, we estimate the model: STD (Q1)jkt = 0 + 1 DIFF jkt + 2STABLEjkt + 3NONOPjkt + j + k + t + ejkt (6)

There is likely to be less agreement among analysts when DIFF = 1 than when DIFF = 0 so we expect the coefficient on DIFF (1) to be positive. As there is likely to be more agreement among analysts when earnings are stable, we expect the coefficient on STABLE (2) to be negative. Because there is likely to be less agreement among analysts when firms report non-operating or extraordinary items, we expect NONOP to have a positive coefficient (3). The coefficients on the two control variables are insignificant.23 More importantly, dispersion is greater when DIFF = 1 than when DIFF = 0 (2 = 0.0037, t-value = 3.41). To determine the economic importance of our results, we compare the 1 coefficient with the intercept (0) which represents dispersion for firms followed by analysts who all agree with the I/B/E/S Q1 actual. Analyst dispersion is 25 percent (.0037/.0151) greater when DIFF = 1 for at least one analyst following the firm, a magnitude which is both economically meaningful and statistically significant.

22

Analyst dispersion may reflect both differences of opinion regarding an earnings number defined in a certain way (e.g., all analysts forecasts include restructuring charges) and differences of opinion regarding an earnings number defined in different ways (e.g., some analysts forecasts exclude restructuring charges while other analysts forecasts include restructuring charges). We do not attempt to distinguish between these differences. 23 They are both significant for the analysis of annual forecasts but they do not have the expected sign.

17

Market reaction coefficients Table 7 provides results from estimating the market reaction to the first quarter earnings surprise. Panel A presents results based on the following specification: CARjkt = a + b * SURPjkt + ejkt (7)

CARjkt is the two-day (-1, 0) cumulative return minus the cumulative value-weighted market return related to the announcement of Q1 earnings for firm j in in industry k in year t. SURPjkt is defined as the I/B/E/S actual Q1 EPS minus the last Q1 estimate issued by an analyst following firm j before the release of Q1 earnings, scaled by lagged stock price.24 We expect the beta coefficient for the DIFF = 0 sub-sample to be higher than that for the DIFF = 1 sub-sample because measurement error in SURP drives the beta coefficient towards zero. Using the entire sample for which we can calculate CAR, b in equation (7) is estimated to be 1.435 (t-statistic = 19.78), conforming to the well-documented evidence that abnormal returns are positively and significantly related to quarterly earnings surprises (Brown and Kennelly 1972; Foster 1977). As in Tables 4 to 6, we partition our sample into DIFF = 0 and DIFF = 1 sub-samples. Columns 2 and 3, respectively, include firm-years for which DIFF = 0 and DIFF = 1 for at least one analyst following the firm.25 The beta coefficient for the market reaction coefficient for the DIFF = 0 sub-sample has nearly twice the magnitude of the DIFF

24

When we examine individual analysts, the term SURPijkt = 1 refers to the difference between the I/B/E/S actual Q1 earnings and the last Q1 forecast issued by analyst i for firm j in industry k during year t before the release of Q1 earnings, scaled by lagged stock price. When we examine firms, the term SURPjkt = 1 refers to the difference between the I/B/E/S actual Q1 earnings and the last Q1 forecast issued by an analyst following firm j in industry k during year t before the release of Q1 earnings, scaled by lagged stock price. For the latter, we use the last forecast in lieu of the consensus forecast because it more closely represents market expectations (Brown and Kim 1991). Thus, the analyst in this regression may either be an analyst for whom DIFF = 1 or DIFF = 0, so our results probably understate the magnitude of the impact of the DIFF phenomenon. 25 For simplicity, we use the term firm-year in lieu of the more correct but more cumbersome -firmindustry-year both in the text and the tables.

18

= 1 sub-sample (1.987/1.036). This economically substantial magnitude is also statistically significant (t-statistic = -6.48). [INSERT TABLE 7 HERE] Panel B provides results which control for STABLE, NONOP, and fixed effects for firm, industry, and year. More specifically, we estimate the following model: CARjkt = 0 + 1 DIFFjkt + 2SURPjkt + 3 DIFFjkt * SURPjkt + 4STABLEjkt + 5NONOPjkt + j + k + t + ejkt Firms with stable earnings should have higher valuation multipliers (Beaver 1998) so we expect 4 to be positive. The market should react less to firms earnings with nonoperating or extraordinary items because their earnings are less permanent (Elliott and Hanna 1996) so we expect 5 to be negative. Scores of studies have shown earnings surprises to be value-relevant (Ball and Brown 1968; Foster 1977; Beaver et al. 1979), so we expect 2 to be positive. We have no priors for the main effect of DIFF which is measured by the sign of 1, but we do have a prior for the coefficient on the interaction of DIFF with SURP (3), our primary variable of interest. The positive relation between market reaction and earnings surprise should be attenuated when DIFF = 1, so we expect 3 to be negative. As expected, there is a positive market reaction to earnings surprises for firm-years when DIFF = 0 (2 = 2.1867, t-value = 13.11). The coefficients on the control variables STABLE and NONOP are insignificant. Most importantly for our purposes, the positive reaction to earnings surprises is substantially mitigated when DIFF = 1 (3 = -0.6026, t-value = -2.74). To determine the economic significance of our results, we compare the ratio of the coefficient of DIFF * SURP to that of SURP. The market reaction to earnings surprise is 28 (8)

19

percent greater when DIFF = 0 than when DIFF = 1, suggesting that our results are both economically meaningful and statistically significant. VI. Replication of prior research One issue that Heflin and Hsu (2008) examine in their study is the Impact of nonGAAP disclosure regulations on the probability that disclosed earnings meet or beat forecasted earnings. They find that non-GAAP disclosure regulations made effective in early 2003 are associated with a reduction in the probability that firms disclosed earnings that meet or beat analysts earnings forecasts. We have shown in Table 3, Panel D that the DIFF phenomenon has become more pervasive over time so it is possible that Heflin and Hsus results were attributable to a relatively larger portion of their sample being subject to the effects of the DIFF phenomenon after non-GAAP disclosure regulations became effective than before that time (i.e., more observations exhibited the DIFF phenomenon due to the temporal effect we documented above). To investigate the possible impact of the temporal increase in the DIFF phenomenon on the Heflin and Hsu (2008) results, we construct a data set similar to theirs for the same March 2000 to February 2005 period. The first column of Table 8 is our replication of Table 5 in Heflin and Hsu (2008) using a sample of 35,142 firm-quarters.26 We use variable definitions that are similar to theirs. NGREGq equals 1 if quarter q is the first quarter of 2003 or later and zero otherwise. POST_01q equals one if quarter q is the first quarter of 2002 or later and zero otherwise. SOXq equals one if quarter q is the third quarter of 2002 or later and zero otherwise. SPECjq equals one if firm j reports a special item in quarter q and zero otherwise. LOSSjq equals one if firm js GAAP earnings in quarter q are less than zero, and

26

Our sample is qualitatively similar to Heflin and Hsu (2008)s sample of 38,886 firm-quarters.

20

zero otherwise. UPEARNjq equals one if firm js GAAP earnings in quarter q are greater than or equal to earnings in the same quarter from the previous year, and zero otherwise. GROWTHjq is firm js quarter q sales growth over the previous years same quarter sales. BTMjq is the ratio of book value of equity over market value of equity for firm j in quarter q. LEVjq equals total liabilities divided by book value of shareholders equity. N_ANLSTjq is the number of analysts following firm j in quarter q. FCSTDjq represents the standard deviation of the most recent analysts forecasts for firm j in quarter q. TECHj equals one if firm j is in a high-tech industry and zero otherwise. RETjq is firm js raw return over quarter q. INDPRDq is the percent change in the quarterly seasonal adjusted industrial production, and QTR4q equals one if quarter q is a fourth quarter and zero otherwise. [INSERT TABLE 8 HERE] Similar to Heflin and Hsu (2008), we obtain positive coefficients on POST_01, SPEC, UPEARN, GROWTH, TECH, and RET in the first column of Table 8, negative coefficients on SOX and FCSTD, and, most importantly, a negative coefficient for their primary variable of interest, NGREG.27 The second column of Table 8 limits the sample to those 3,820 firmquarters used in Column 1 which we identify as DIFF = 1. We find a negative and significant coefficient on NGREG in this sub-sample. The third column of Table 8 limits the sample to those 11,931 firm-quarters used in Column 1 which we identify as DIFF = 0. We do not obtain a significant coefficient on NGREG in this sub-sample, and the magnitude of the coefficient on NGREG in column three is 94.2 percent smaller than that in column two. Overall, our results suggest that Heflin and Hsu (2008) may have reached a different

27

In Table 8, with the exception of the coefficient on SOX, all these variables coefficients are significant.

21

conclusion if they had confined their sample to observations that were not subject to the DIFF phenomenon. VII. Robustness tests

Tests using the magnitude of the DIFF phenomenon (MDIFF) Thus far we have used a zero-one indicator variable to proxy for the DIFF phenomenon based on whether there is at least a penny difference between the analysts inferred EPS and the I/B/E/S actual EPS. This approach has two disadvantages: (1) it ignores the magnitude of the DIFF phenomenon; and (2) all cutoffs are arbitrary. We repeat our multivariate analyses of accuracy, revision, dispersion, and market reaction for Q1 using the following continuous (magnitude) measure of the DIFF phenomenon (MDIFF)28: MDIFFijkt = Analyst Inferred EPS (Q1)ijkt EPS (Q1)ijkt (9)

Analyst Inferred EPS (Q1) is the difference between the analysts forecast of the year minus the forecast of Q2 + Q3 + Q4, conditional on Q1 having been reported; and EPS is Q1 earnings as reported by I/B/E/S. We employ the following multivariate regression model, which is a modification of equation (3), to examine accuracy: Accuracyijkt = 0 + 1|MDIFFijkt|+ 2FEXPijkt + 3FREQijkt + 4NFIRMSijkt + 5BSIZEijkt + 6HORIZONijkt + 7NONOPjkt + i + j + k + t + eijkt Equation (10) differs from equation (3) only in that it uses MDIFF in lieu of DIFF. Panel A of Table 9 indicates that the 1 coefficient on |MDIFF| is positive and significant (coefficient = 0.1748; t-value = 38.48). Moreover, MDIFF has the largest t-value of any of the independent
28

(10)

When we examine individual analysts in Equation 10, the term MDIFFijkt refers to the difference between analyst is inferred EPS and the I/B/E/S Q1 actual for firm j in industry k in year t. In Equation 11, MDIFFjkt refers to the mean value of MDIFFijkt for firm j in industry k in year t.

22

variables, indicating it has the most incremental power of any of the independent variables for explaining the variability in analyst forecast accuracy.29 Equation (10) has over six times the explanatory power of equation (3), 8.1 percent versus 1.3 percent, revealing that it is more powerful than the DIFF indicator variable model for the purpose of explaining the variability in analyst forecast accuracy. [INSERT TABLE 9 HERE] We use the following multivariate regression, which is a modification of equation (6), to examine analyst forecast dispersion: STD (Q1)jkt = 0 + 1|MDIFFjkt|+ 2STABLEjkt + 3NONOPjkt + j + k + t + ejkt (11)

Equation (11) differs from equation (6) only in that it uses MDIFF in lieu of DIFF. Panel A of Table 9 indicates that the 1 coefficient on |MDIFF| is positive and significant (coefficient = 0.1985, t-value = 3.58) with the largest t-value of any of the independent variables, indicating it provides the greatest incremental power for explaining the variability in earnings forecast dispersion. Equation (11) has similar explanatory power to equation (6), 2.3 percent versus 2.3 percent, revealing that it is as powerful as the DIFF model. We employ the following multivariate regression, which is a modification of equation (5), to examine analyst forecast revisions: REV_9Mijkt = 1QN1ijkt + 2QN2ijkt + 3QN3ijkt + 4QN4ijkt + 5QN5ijkt + 6SURPijkt * QN1ijkt + 7SURPijkt * QN2ijkt + 8SURPijkt * QN3ijkt + 9SURPijkt * QN4ijkt + 10SURPijkt * QN5ijkt + 11NONOPjkt + i + j + k + t + eijkt (12)

29

Recall that NONOP had a higher t-value than DIFF in the estimation of equation (3) in Table 4 Panel B.

23

Equation (12) differs from equation (5) by interacting SURPijkt with the quintile ranking of the absolute value of MDIFFijkt, denoted by the indicator variables QN1ijkt through QN5ijkt.30 While the focal point of equation (5) is the interaction between DIFF and SURP, we are also interested in how the coefficient on SURP changes as we move from the lowest (QN1) to the highest (QN5) quintile of the absolute value of MDIFF. We expect the analyst to revise his earnings forecast of the remainder of the year in the direction of SURP. Thus, we expect the coefficient on SURP to be positive. We also expect the coefficient on SURP to decrease as we move to higher levels of MDIFF because increased measurement error drives coefficient estimates to zero. Consistent with our expectations, Panel B of Table 9 reveals that the coefficient of SURP decreases nearly monotonically as the quintile rank of MDIFF increases. We run the following modification of equation (8) to examine the market reaction to earnings surprise: CARjkt = 1QN1jkt + 2QN2jkt + 3QN3jkt + 4QN4jkt + 5QN5jkt + 6SURPjkt * QN1jkt + 7SURPjkt * QN2jkt + 8SURPjkt * QN3jkt + 9SURPjkt * QN4jkt + 10SURPjkt * QN5jkt + 11STABLEjkt + 12NONOPjkt + j + k + t + ejkt Similar to equation 12, equation (13) differs from equation (8) by interacting SURPjkt with the quintile ranking of the absolute value of MDIFFjkt denoted by the Indicator variables QN1jkt through QN5jkt. While equation (8) focuses on the interaction term between DIFF and SURP, the focus of equation (13) is on how the coefficient on SURP changes as we move from the lowest (QN1) to the highest (QN5) quintile of the absolute value of MDIFF. Capital
30

(13)

Unlike accuracy and dispersion, the results for revisions and market reaction cannot easily be compared using MDIFF versus DIFF since the MDIFF formulations have more explanatory variables than their DIFF counterparts.

24

markets should react in the direction of the earnings surprise (SURP) so we expect SURPs coefficient to be positive. We also expect SURPs coefficient to decrease as we move to higher levels of MDIFF because increased measurement error drives the coefficient estimate more to zero. Consistent with our expectations, the coefficient of SURP in Panel B of Table 9 decreases monotonically as the amount of the measurement error in SURP, as proxied by the quintile of the absolute value of MDIFF, increases. Tests using a common sample Our main tests for accuracy, revision, dispersion, and market reaction have required varying sample sizes, as described in section III. In untabulated tests, we re-estimate each of our four main tests using a common sample size. Inferences for the accuracy, revision, and dispersion tests are unchanged. For the market reaction test, as in Table 7, we continue to find a negative coefficient on DIFF * SURP but that coefficient is no longer significantly different from zero. VIII. Conclusions We examine the prevalence of, factors associated with, and adverse consequences of I/B/E/S reported actual EPS differing from the earnings analysts forecast when they issue their earnings estimates, which we refer to as the DIFF phenomenon. We find that the I/B/E/S reported actual Q1 EPS differs from the analysts inferred actual Q1 EPS by at least one cent 39 percent of the time during our sample period and 50 percent of the time in the last three years of our sample period. The DIFF phenomenon arises less often for higherquality analysts (those employed by larger brokerage houses, who forecast more often, and who follow fewer firms); for firms not reporting non-operating or extraordinary items and for firms followed by fewer analysts; and for the energy, transportation and utility

25

industries. When the DIFF phenomenon occurs, analysts are likely to make less accurate earnings forecasts, analysts forecast revision coefficients are likely to be smaller, analysts are likely to make more disparate earnings forecasts, and capital markets are likely to react less to firms earnings surprises. The economic magnitude of the DIFF phenomenon is reflected by the fact that when DIFF = 1, analysts absolute forecast errors are nearly twice as large; analyst forecast revision coefficients are 38 percent smaller; analyst forecast dispersion is over 25 percent larger; and capital markets react nearly 28 percent less to earnings surprises. We provide three ways for users of I/B/E/S reported actual EPS data who examine forecast accuracy, forecast revision, forecast dispersion, and market reaction to earnings surprise to increase the power of their tests. The first method is to use an indicator variable if the absolute value of the difference between the I/B/E/S actual and the analysts inferred actual is at least one penny.31 A second approach is to use the absolute value of the magnitude of the difference between the I/B/E/S actual and the analysts inferred actual. The third approach is to omit cases where the absolute value of the difference between the I/B/E/S actual and the analysts inferred actual is substantial (e.g., at least one penny). We examine whether ignoring the DIFF phenomenon might have affected the interpretation of some results of prior studies. We replicate Heflin and Hsus (2008) investigation of the impact of non-GAAP disclosure regulations on the probability that disclosed earnings meet or beat forecasted earnings. We obtain results similar to theirs when we either use a sample similar to theirs or when we use a sub-sample of firm-quarters for which the DIFF phenomenon is present, but we obtain much different results when we
31

Researchers requiring individual analysts forecasts can estimate the analysts inferred actual for three o f the four fiscal quarters.

26

use a sub-sample of firm-quarters for which the DIFF phenomenon is absent. More specifically, the magnitude of their coefficient of interest is 94.2 percent lower for the subsample of DIFF = 0 (DIFF phenomenon is absent) than for the sub-sample of DIFF = 1 (DIFF phenomenon is present), suggesting they may have made different inferences if they omitted observations subject to the DIFF phenomenon. We show that the DIFF phenomenon occurs 36.5 percent of the time when only one analyst follows a firm, nearly as often as the 39 percent of the time shown for our entire sample. When only one analyst follows a firm, this analyst is the mean, mode, median, majority, and the consensus forecast. This finding has two important implications for researchers and other users of I/B/E/S earnings data. First, I/B/E/S reported actual EPS often do not appear to adhere to the majority rule. Second, the DIFF phenomenon pertains to both consensus earnings forecasts and individual analyst estimates. Our study is related to Payne and Thomas (2003) (hereafter PT) but the two studies differ in three major respects. First, PT examined the effect of rounding in the I/B/E/S earnings database, while we examine the effect of differences between I/B/E/S reported actual earnings and analysts inferred actual earnings. Second, PT suggested researchers use non-split adjusted I/B/E/S earnings data, while we provide three ways for users of I/B/E/S EPS data who examine forecast accuracy, forecast revisions, forecast dispersion, or market reactions to earnings surprises to increase the power of their tests by taking the DIFF phenomenon into consideration. Third, PT indicated that research conclusions of studies using split-adjusted I/B/E/S earnings data are most likely to be affected in samples with larger firms, higher price to book firms and better performers, while we find that research conclusions of studies using I/B/E/S earnings data ignoring the DIFF phenomenon are most

27

likely to be affected if they focus on low-quality analysts (those who work for smaller brokerage houses, forecast less frequently, and follow many firms), on firms followed by many analysts and those reporting non-operating earnings or extraordinary items, on the energy, utility and transportation industries, or on samples using earnings data from recent years. Our study is also related to Ljungqvist, Malloy, and Marston (2009) (hereafter LMM) but these two studies differ in three major respects. First, LMM find discrepancies in the I/B/E/S recommendations data base while we find differences between I/B/E/S actual earnings and analyst inferred actual earnings. Second, LMM suggest that discrepancies in the recommendations data base have been mitigated in recent years, but we find that the DIFF phenomenon has become much more prevalent in recent years. Third, LMM conclude that researchers cannot address most of the problems they identify, whereas we provide researchers with three ways to address the DIFF phenomenon. We close with some caveats and suggestions for future research. Our findings and interpretations of our findings are based on the validity of our procedure for estimating analyst inferred actual earnings. Future research may wish to examine the validity of our procedure, and to try to derive a more reliable procedure than the one we have introduced to the literature. Moreover, we have confined our analyses to a particular expectations data base with a focus on earnings. Future research may wish to determine the pervasiveness and the adverse consequences of differences between data-provider actuals and analyst inferred actuals in other sources of U.S. earnings expectations data (Zacks, First Call), international earnings expectations data, and in non-earnings expectations data (e.g. cash flows, revenues, dividends).

28

APPENDIX 1: Variable Definitions of Terms

\

Variable

Definition
=

Accuracy (FY)ijkt = Accuracy (Q1)ijkt

EPS ( FY ) jkt AF ( FY ) ijkt price jkt 1 EPS (Q1) jkt AF (Q1) ijkt ) price jkt 1

AF (FY)ijkt AF (Q1)ijkt BSIZEijkt

= = =

Analyst is forecast of firm j in industry k in fiscal year t EPS obtained from I/B/E/S Analyst is forecast of firm j in industry k of Q1 EPS for year t obtained from I/B/E/S Analyst is brokerage size, calculated as the number of analysts employed by the brokerage house of analyst i following firm j in industry k in year t minus the minimum number of analysts employed by brokerage houses of all analysts following firm j in year t, with this difference scaled by the range of brokerage house sizes for all analysts following firm j in year t book value of equity (SEQQ from Compustat) over market value of equity obtained from CRSP for firm j in quarter q Two-day (-1,0) cumulative return minus cumulative value-weighted market return related to the announcement of Q1 earnings for firm j in industry k in year t where 0 is the Q1 earnings announcement day 1 when analyst i following firm j in industry k has an annual forecast for year t made after the release of Q1 EPS in year t that exceeds the absolute value of the sum of the I/B/E/S Q1 actual EPS and the analysts EPS forecast of the remainder of year t by at least one penny (See also Appendix 2) 1 when at least one analyst following firm j in industry k has an annual forecast for year t made after the release of Q1 EPS in year t that exceeds the absolute value of the sum of the I/B/E/S Q1 actual EPS and the analysts EPS forecast of the remainder of year t by at least one penny (See also Appendix 2) Actual annual EPS for firm j in industry k in fiscal year t obtained from I/B/E/S Actual Q1 EPS for firm j in industry k in fiscal year t obtained from I/B/E/S

BTMjq CARjkt

= =

DIFFijkt

DIFFjkt

EPS (FY)jkt EPS (Q1)jkt

= =

29

FCSTDjq FEXPijkt

= =

The standard deviation of the most recent analysts forecasts for firm j in quarter q Analyst is firm experience, calculated as the number of prior forecasting years for analyst i following firm j in industry k in year t minus the minimum number of prior forecasting years for all analysts following firm j in year t, with this difference scaled by the range of prior forecasting years for all analysts following firm j in year t Analyst is forecast frequency, calculated as the number of firm j forecasts made by analyst i following firm j in industry k in year t minus the minimum number of firm j forecasts for all analysts following firm j in year t, with this difference scaled by the range of number of firm j forecasts issued by all analysts following firm j in year t Firm js quarter q sales growth over the previous years same quarter sales (SALEQ from Compustat) Analyst is horizon, calculated as the number of days from the year t forecast date (following the release of Q1 earnings) to the earnings announcement date for analyst following firm j in industry k in year t minus the minimum forecast horizon for all analysts who follow firm j in year t, with this difference scaled by the range of forecast horizons for all analysts following firm j in year t Quarter q percentage change in the quarterly seasonal adjusted U.S. industrial production, obtained from www.federalreserve.gov Total liabilities (DEBTQ from Compustat) divided by book value of shareholders equity (SEQQ from Compustat) for firm j in quarter q 1 if firm js GAAP earnings in quarter q (EPSFIQ from Compustat) are less than zero Analyst inferred actual IBES actual, scaled by pricet-1, where the analyst inferred actual is the difference between analyst is forecast for the fiscal year t and the sum of the analysts forecasts for Q2, Q3, and Q4 of the same year for firm j in industry k Difference between the inferred EPS and the I/B/E/S Q1 actual, scaled by pricet-1, for the analyst who issued the last Q1 estimate for firm j in industry k before the release of Q1 earnings in year t number of analysts following firm j in quarter q The number of firms followed, calculated as the total number of firms followed by analyst i following firm j in industry k in year t minus the minimum number of firms followed by all analysts covering firm j in year t, with this difference scaled by the range of the number of firms

FREQijkt

GROWTHjq HORIZONijkt

= =

INDPRDq LEVjq LOSSjq MDIFFijkt

= = = =

MDIFFjkt

N_ANLSTjq NFIRMSijkt

= =

30

followed by all analysts covering firm j in year t NGREGq NONOPjkt = = 1 if quarter q is the first quarter of 2003 or later 1 when the absolute value of the difference between Q1 EPS Compustat operating earnings (OEPSXQ from Compustat) and Compustat earnings after extraordinary items (EPSFIQ from Compustat) exceeds one penny for firm j in industry k in year t 1 if quarter q is the first quarter of 2002 or later Stock price for firm j in industry k as of the end of fiscal year t-1 obtained from CRSP Indicator variables that = 1 if the absolute value of MDIFF is in the first fifth quintile 1 if quarter q is a fiscal fourth quarter (i.e. if FQTR from Compustat = 4) firm js raw return over quarter q, compounded using daily returns obtained from CRSP The difference between analyst is first estimate of Q2 through Q4 for firm j in industry k issued after the release of Q1 earnings and the same analysts last estimate of Q2 through Q4 issued before the release of Q1 earnings during year t, scaled by stock price as of the end of fiscal year t1 obtained from CRSP 1 if quarter q is the third quarter of 2002 or later 1 if firm j reports a special item (SPIQ from Compustat) in quarter q I/B/E/S stability measure, defined by I/B/E/S as a gauge of annual EPS growth consistency over the past 5 years for firm j in industry k in year t Standard deviation of analysts EPS estimates for firm j in industry k, for a given quarter or year t, for those firms with >1 analyst following in our sample

POST_01q Pricejkt-1 QN1 QN5 QTR4q RETjq REV_9Mijkt

= = = = = =

SOXq SPECjq STABLEjkt STDjkt

= = = =

SURPijkt

EPS (Q1) jkt AF (Q1)ijkt price jkt 1 EPS (Q1) jkt AF (Q1) jkt price jkt 1
1 if firm j is in a high-tech industry and zero otherwise 1 if firm js GAAP earnings in quarter q (EPSFIQ from Compustat) are greater than or equal to earnings in the same quarter from the previous year

SURPjkt

TECHj UPEARNjq

= =

31

APPENDIX 2: Calculation of the DIFF variable

Assume: EPS (Q1) = Actual Q1 EPS according to I/B/E/S AF (FY/Q1) = Analysts forecast of annual EPS according to I/B/E/S issued after the quarter 1 earnings announcement AF ((Q2+Q3+Q4)/Q1) = Analysts forecast of EPS for the remainder of the fiscal year issued after the quarter 1 earnings announcement We define the Analysts Inferred EPS (Q1) = AF (FY/Q1) AF ((Q2+Q3+Q4)/Q1) MDIFF = |Analyst Inferred EPS (Q1) EPS (Q1)| DIFF = 1 if MDIFF 0.01 and DIFF = 0 if MDIFF < 0.01

32

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FIGURE 1 Timeline

FIGURE 2 Distribution of Differences between I/B/E/S Q1 Actual EPS and Analysts Inferred Q1 EPS

This figure presents the distribution of the difference between the analysts inferred Q1 EPS and the I/B/E/S Q1 actual for the 32,019 analyst-firm-years in our sample. Variable definitions are in Appendix 1.

35

TABLE 1 Sample Selection Procedure for the Main Analysis

Criteria

Analystfirm-years

Firm-years

Firm-years: U.S. firm-years with FYt-1, Q1t, and Q2t reporting dates available from I/B/E/S for 1996 to 2008 Keep: Firm-years with I/B/E/S actual Q1t and FYt earnings Keep: Firm-years with year t-1 prices available from CRSP 74,009 66,151 60,681

Analyst-firm-years: Analyst-firm-years with Q2t, Q3t, Q4t, and FYt EPS forecasts issued on the same day after the release of Q1t earnings Keep: Analyst-firm-years with Q1t EPS forecasts issued on any day after the release of FYt-1 earnings but prior to the release of Q1t earnings (Table 4) Analyst-firm-years with 1 analyst following in our sample Analyst firm-years with >1 analyst following in our sample (Table 6) Sub-samples: Analyst-firm-years with FYt EPS forecasts issued after the release of FYt-1 earnings but prior to the release of Q1t earnings (Table 4) Analyst-firm-years with Q2t, Q3t, and Q4t EPS forecasts issued after the release of FYt-1 earnings but prior to the release of Q1t earnings (Table 5) Analyst-firm-years with FYt EPS forecasts issued after the release of FYt-1 earnings but prior to the release of Q1t earnings, with > 1 analyst following (Table 6) Firm-years with non-missing CARjkt (Table 7) 24,427 15,060 83,789 32,019 11,381 20,638 33,650 18,533 11,381 7,152

21,197

14,065

14,537

5,169

18,533

This table summarizes the procedure used to select the sample for Tables 4, 5, 6, and 7. Variable definitions are in Appendix 1.

36

TABLE 2 Estimation of Model with Analyst, Firm, Industry, and Year Fixed Effects
Analysts (1) Firms (2) I/B/E/S Industries (3) Years (4) 13 -19,097.2 0.00 Full Model (5) 28,584 -2,835.7 0.00
1

Logit Model

N 3,710 4,327 11 Log-likelihood -7,723.5 -10,335.4 -19,025.0 2 Prob > 0.00 0.00 0.00 1 Sample sizes and full-model log-likelihood are reported. This table estimates the following equation using a logit specification: DIFFijkt = i + j + k + t + ijkt

Observations in which the analyst or firm appears only once in the full sample are deleted in order to estimate the fixed effects models. Variable definitions are in Appendix 1.

37

TABLE 3 Investigation of Analyst, Firm, Industry, and Year Effects

Panel A Analyst Effects Intercept FEXPijkt FREQijkt NFIRMSijkt BSIZEijkt HORIZONijkt % Concordant (1) Pr(DIFFijkt)=1 0.5059 (<0.0001) (2) 0.0500 (0.1269) (3) -0.1138 (0.0051) (4) 0.0880 (0.0189) (5) -0.1257 (0.0005) (6) 0.0509 (0.2956) 49.9 28,526 Number of analyst-firmyears

Panel B Firm Effects

ANF=1 (1)

ANF=2 (2) 8,324 0.382

ANF=3 (3) 4,527 0.391

ANF=4 (4) 2,772 0.424

ANF5 (5) 5,015 0.448

# analyst-firm-years % DIFFijkt

11,381 0.365

Panel C Industry Effects

Basic (1)

Capital (2) 2,072 32.0

ConsDur ConsNonDur (3) 1,365 37.1 (4) 1,045 33.8

ConsSvc (5) 4,538 40.3

Energy (6) 4,668 47.6

Finance (7) 5,268 36.5

Health (8) 2,535 36.7

Technol (9) 5,078 37.1

Transp (10) 1,363 45.6

Utility (11) 1,219 45.0

Total

# analyst-firm-years % DIFFijkt

2,848 36.8

32,019 39.1

38

TABLE 3 (continued)

Panel D Year Effects a b % Concordant # analyst-firm-years

Total

-0.586*** 0.018*** 48.1 32,019

This table investigates the effects of analysts, firms, industries, and years on the DIFF indicator variable. Panel A presents results based on estimating the following equation using a logit specification for the subsample of analyst-firm-years for which the analyst variables could be estimated (p-values are in parentheses): Pr (DIFFijkt=1) = 0 + 1FEXPijkt + 2FREQijkt + 3NFIRMSijkt + 4BSIZEijkt + 5HORIZONijkt + eijkt Panel B provides the number and percent of analyst-firm-years for DIFF = 1 for one, two, three, four, and five or more analysts following the firm. Panel C provides the number and percent of analyst-firm-years for DIFF = 1 for each I/B/E/S industry and for the full sample. Panel D presents results of estimating the following specification for each I/B/E/S industry and for the full sample: Pr (DIFFijkt=1) = a + b*Yeart + eijkt Results are pooled. Variable definitions are in Appendix 1.

39

TABLE 4 Analysts Earnings Forecast Accuracy

All observations (1) A. Analyses without control variables Accuracy (Q1)ijkt N Accuracy (FY)ijkt N 0.0042 32,019 0.0378 24,427

DIFFijkt = 0 (2)

DIFFijkt = 1 (3)

(3) (2)

0.0037 19,489 0.0349 14,761

0.0049 12,530 0.0423 9,666

0.0012*** (13.65)

0.0074*** (7.95)

40

TABLE 4 (continued)
B. Analyses with control variables Dependent variable is: Intercept DIFFijkt FEXPijkt FREQijkt NFIRMSijkt BSIZEijkt HORIZONijkt NONOPjkt Analyst Effects Firm Effects Industry Effects Year Effects Adj. R
2

Predicted sign ? + + + +

Accuracy(Q1)ijkt Accuracy(FY)ijkt 0.0004* (1.76) 0.0004*** (4.62) 0.0005*** (3.42) -0.0002 (-1.13) 0.0006*** (3.43) -0.0002 (-0.73) 0.0013*** (6.49) 0.0004*** (5.34) Yes Yes Yes Yes 0.013 19,765 0.0099*** (4.34) 0.0022*** (2.92) 0.0058*** (3.91) 0.0019 (1.16) 0.0008 (0.42) -0.0045* (-1.79) 0.0037* (1.88) 0.0018** (2.43) Yes Yes Yes Yes 0.021 15,444

Number of Analyst-firm-years

41

TABLE 4 (continued)
This table estimates the accuracy of analysts EPS estimates. Accuracy is defined as the absolute value of the difference between actual Q1 (FY) earnings and the analysts last EPS estimate of Q1 (FY) preceding the release of Q1 EPS, scaled by lagged stock price. Both actual earnings and analysts earnings forecasts are obtained from I/B/E/S. Stock price is obtained from CRSP. DIFF equals zero when analyst i following firm j has an annual forecast for year t made after the release of Q1 EPS in year t that is within one penny of the sum of the I/B/E/S Q1 actual and the analysts forecast of the remainder of year t . DIFF equals one when analyst i following firm j has an annual forecast for year t made after the release of Q1 EPS in year t that is not within one penny of the sum of the I/B/E/S Q1 actual and the analysts forecast of the remainder of year. Panel A presents univariate results. Panel B presents multivariate results which control for analyst characteristics, NONOP, analyst effects, firm effects, industry effects, and year effects using the following specification: Accuracyijkt = 0 + 1DIFFijkt + 2FEXPijkt + 3 FREQijkt + 4NFIRMSijkt + 5BSIZEijkt + 6HORIZONijkt + 7NONOPjkt + i + j + k + t + eijkt Results are pooled. T-statistics are in parentheses. ***, **, and * denote significance at the 1%, 5%, and 10% levels, based on one-tailed tests, respectively. All variable definitions are in Appendix 1.

42

TABLE 5 Analysts Earnings Forecast Revisions

All observations (1) A. Analyses without control variables b Adj. R N

2

DIFFijkt = 0 (2)

DIFFijkt = 1 (3)

(3) (2)

0.9079*** (56.43) 0.131 21,197

1.0941*** (50.15) 0.168 12,446

0.7497*** (31.18) 0.100 8,751

-0.3440*** (-10.70)

B. Analyses with control variables Dependent variable is: Intercept DIFFijkt SURPijkt DIFFijkt * SURPijkt NONOPjkt Analyst Effects Firm Effects Industry Effects Year Effects Adj. R
2

Predicted sign ? ? + -

REV_9Mijkt -0.0002 (-0.34) 0.0002 (0.87) 0.8636*** (31.26) -0.3256*** (-8.44) 0.0001 (0.47) Yes Yes Yes Yes 0.096 14,464

Number of Analyst-firm-years

43

TABLE 5 (continued)
This table estimates the revision of analysts EPS forecasts. The revision of the analysts EPS estimate for Q2 through Q4 (REV_9M) is defined as the difference between the analysts first 9M estimat e after the release of Q1 earnings and the same analysts last 9M estimate before the release of Q1 earnings, scaled by lagged stock price, where the 9M estimate is the summation of the estimates of Q2, Q3, and Q4. Earnings surprise (SURP) is defined as the difference between the I/B/E/S Q1 actual earnings and the same analysts last Q1 estimate before the release of Q1 earnings, scaled by lagged stock price . DIFF equals zero when analyst i following firm j has an annual forecast for year t made after the release of Q1 EPS in year t that is within one penny of the sum of the I/B/E/S Q1 actual and the analysts forecast of the remainder of year t. DIFF equals one when analyst i following firm j has an annual forecast for year t made after the release of Q1 EPS in year t that is not within one penny of the sum of the I/B/E/S Q1 actual and the analysts forecast of the remainder of year.Panel A uses the following specification: REV_9Mijkt = a + b*SURPijkt + eijkt

Results for the intercepts are excluded for simplicity. The final column compares the slope coefficients in columns 2 and 3. Panel B presents results which control for NONOP, and analyst, firm, industry, and year effects: REV_9Mijkt = 0 + 1DIFFijkt + 2SURPijkt + 3DIFFijkt * SURPijkt + 4NONOPjkt + i + j + k + t + eijkt

Results are pooled. T-statistics are in parentheses. ***, **, and * denote significance at the 1%, 5%, and 10% levels, based on one-tailed tests, respectively. All variable definitions are in Appendix 1.

44

TABLE 6 Dispersion of Analysts Earnings Forecasts

All observations (1) A. Analyses without control variables STD (Q1) jkt N STD (FY) jkt N 0.0463 7,152 0.1932 5,169

DIFFjkt = 0 (2)

DIFFjkt = 1 (3)

(3) (2)

0.0445 6,075 0.1864 4,426

0.0569 1,077 0.2335 743

0.0125*** (4.51)

0.0471*** (3.53)

45

TABLE 6 (continued)

B. Analyses with control variables Dependent variable is: Intercept DIFFjkt STABLEjkt NONOPjkt Firm Effects Industry Effects Year Effects Adj. R
2

Predicted sign

STD(Q1)jkt 0.0151*** (4.47) 0.0037*** (3.41) 0.000001 (0.55) 0.0005 (0.43) Yes Yes Yes 0.023 13,986

STD(FY)jkt 0.0669*** (4.85) 0.0117*** (2.85) 0.00002*** (4.14) -0.0098** (-2.38) Yes Yes Yes 0.043 11,460

+ +

Number of Firm-years

This table estimates the dispersion of analysts EPS estimates. Dispersion is defined as the average of the standard deviation of analysts EPS estimates for a given interval for those firms with >1 analyst following in our sample. DIFF equals one when at least one analyst following firm j in industry k has an annual forecast for year t made after the release of Q1 EPS in year t that is not within one penny of the sum of the I/B/E/S Q1 actual and the analysts forecast of the remainder of year, and equals zero otherwise. Panel A presents univariate results without control variables. Panel B presents results which control for STABLE, NONOP, and firm, industry, and year effects, using the following specification: STD (Q1) jkt = 0 + 1DIFFjkt + 2STABLEjkt + 3NONOPjkt + j + k + t + ejkt

Results are pooled. T-statistics are in parentheses. ***, **, and * denote significance at the 1%, 5%, and 10% levels, based on one-tailed tests, respectively. All variable definitions are in Appendix 1.

46

TABLE 7 Market Reaction to Earnings Surprises

All observations (1) A. Analyses without control variables B Adj. R N

2

DIFFjkt = 0 (2)

DIFFjkt = 1 (3)

(3) (2)

1.4348*** (19.78) 0.021 18,533

1.9868*** (17.62) 0.031 9,617

1.0357*** (10.99) 0.013 8,908

-0.9511*** (-6.48)

B. Analyses with control variables Dependent variable is: Intercept DIFFjkt SURPjkt DIFFjkt * SURPjkt STABLEjkt NONOPjkt Firm Effects Industry Effects Year Effects Adj. R
2

Predicted sign ? ? + + -

CARjkt 0.0013 (0.39) -0.0002 (-0.14) 2.1867*** (13.11) -0.6026*** (-2.74) -0.00002 (-0.13) 0.0009 (0.73) Yes Yes Yes 0.027 10,264

Number of Firm-years

47

TABLE 7 (continued)
This table estimates the stock market reaction to first quarter earnings surprise. CAR represents two-day (-1, 0) abnormal returns where day 0 is the release of Q1 earnings. DIFF equals one when at least one analyst following firm j has an annual forecast for year t made after the release of Q1 EPS in year t that is not within one penny of the sum of the I/B/E/S Q1 actual and the analysts forecast of the remainder of year, and equals zero otherwise. Panel A uses the following specification: CARjkt = a + b*SURPjkt + ejkt

Results for intercepts are excluded for simplicity. The final column compares the slope coefficients in columns 2 and 3. Panel B presents results which control for STABLE, NONOP, and firm, industry, and year effects, using the following specification: CARjkt = 0 + 1DIFFjkt + 2SURPjkt + 3DIFFjkt*SURPjkt + 4STABLEjkt + 5NONOPjkt + j + k + t + ejkt Results are pooled. T-statistics are in parentheses. ***, **, and * denote significance at the 1%, 5%, and 10% levels, based on one-tailed tests, respectively. All variable definitions are in Appendix 1.

48

TABLE 8 Impact of Non-GAAP Disclosure Regulations on the Probability Disclosed Earnings Meets or Beats Forecasted Earnings
2000-2005 All Firms (1) Intercept NGREG POST_01 SOX SPEC LOSS UPEARN GROWTH BTM LEV N_ANLST FCSTD TECH RET INDPRD QTR4 Max-rescaled R
2

2000-2005 DIFF=1 (2) -0.542*** -0.294** 0.456*** 0.004 0.146** -0.447*** 1.017*** 0.220*** -0.014 0.002 0.012** -1.567*** 0.184** 0.753*** -1.455**

2000-2005 DIFF =0 (3) -0.390*** -0.017 0.314*** -0.133 0.032 -0.350*** 0.879*** 0.243*** 0.002 0.0001 -0.005 -1.902*** 0.326*** 0.777*** -1.212***

-0.275*** -0.068** 0.231*** -0.074 0.047* -0.411*** 0.833*** 0.091*** 0.002 -0.0004 0.002 -2.171*** 0.276*** 0.676*** -1.206*** -0.054** 0.103 35,142

0.151 3,820

0.117 11,931

Number of firm-quarters

49

TABLE 8 (continued)
This table replicates Table 5 of Heflin and Hsu (2008) using a similar sample to theirs in Column 1, the subsample of firm-quarters for which we can identify DIFF = 1 in Column 2, and the sub-sample of firmquarters for which we can identify DIFF = 0 in Column 3. ***, **, and * denote significance at the 1%, 5%, and 10% levels, based on one-tailed tests, respectively. All variable definitions are in Appendix 1.

50

TABLE 9 Analyses Using MDIFF in lieu of DIFF

Panel A: Dependent variable is: Intercept |MDIFFijkt| |MDIFFjkt| FEXPijkt FREQijkt NFIRMSijkt BSIZEijkt HORIZONijkt STABLEjkt NONOPjkt Analyst Effects Firm Effects Industry Effects Year Effects Adj. R
2

Predicted sign ? + + + + +

Accuracy(Q1)ijkt 0.0005** (2.27) 0.1748*** (38.48)

STD (Q1)jkt 0.0167*** (5.01)

0.1985*** (3.58) 0.0005*** (3.36) -0.0003* (-1.80) 0.0006*** (3.09) -0.0002 (-0.65) 0.0014*** (7.01) 0.00001 (0.50) 0.0005 (0.50) No Yes Yes Yes 0.023 13,986

0.0004*** (4.78) Yes Yes Yes Yes 0.081 19,765

Number of observations

51

TABLE 9 (continued)

Panel B: Dependent variable is: QN1 QN2 QN3 QN4 QN5 SURP * QN1 SURP * QN2 SURP * QN3 SURP * QN4 SURP * QN5 STABLE NONOP Analyst Effects Firm Effects Industry Effects Year Effects Adj. R
2

Predicted sign ? ? ? ? ? + + + + + + +/-

REV_9Mijkt -0.0001 (-0.08) -0.0002 (-0.24) -0.0001 (-0.13) 0.0002 (0.22) -0.0003 (-0.49) 1.0741*** (16.43) 0.8591*** (13.19) 0.6473*** (11.48) 0.8985*** (19.77) 0.5510*** (20.75)

CARjkt 0.0016 (0.45) -0.0002 (-0.06) 0.0003 (0.08) 0.0026 (0.08) 0.0020 (0.56) 3.3140*** (9.09) 3.0727*** (8.04) 3.0599*** (8.31) 1.9507*** (7.32) 1.2327*** (8.65) -0.0000008 (-0.04) 0.0008 (0.68) No Yes Yes Yes 0.031 10,264 p<0.0001

0.0001 (0.50) Yes Yes Yes Yes 0.097 14,464 p<0.0001

Number of observations F-test: SURP * Q1 SURP * Q5

52

TABLE 9 (continued)
This table repeats the panel B analyses in Tables 4 to 7 using the magnitude of the difference between the analysts inferred Q1 actual and the I/B/E/S Q1 actual. Panel A investigates accuracy and dispersion by using the absolute value of MDIFF. Panel B investigates revisions and market reactions to earnings surprises. It uses the five quintiles of the absolute value of MDIFF ordered from smallest to largest. Number of observations refers to the number of analyst-firm-years for the accuracy and revision tests, and to the number of firm- years for the dispersion and market reactions to earnings surprises tests. Results are pooled. T-statistics are in parentheses. ***, **, and * denote significance at the 1%, 5%, and 10% levels, based on one-tailed tests, respectively. All variable definitions are in Appendix 1.

53