Forward-Looking Disclosures, Financial Verifiability and Analysts' Forecasts: A Study of Cross-Listed European Firms

Forward-looking disclosures are a crucial source of information when valuing a company. We study the effect of forward-looking disclosures on analysts' forecast properties, in particular accuracy and dispersion. Our sample includes all the non-financial firms from Italy, Germany, France and Switzerland that in year 2002 were cross-listed on local stock exchanges and on the New York Stock Exchange. We conduct a content analysis on the Annual Report and the 20F form of these companies for the years 2002, 2003 and 2004. We differentiate between forward-looking information on the basis of the disclosure of expected effects on future financial performance and the disclosure of a measure of this impact. We define forward-looking information disclosed with the characteristics of being quantified and directed (and financial) as financially verifiable as it facilitates the comparison with its subsequent realisation in relation to expected future financial performance. Our analysis finds support for the theoretical prediction that verifiable disclosures are more effective than unverifiable disclosures at improving accuracy and reducing dispersion of analysts' forecasts. Our sample also allows us to explore the effects of the difference between the degrees of verifiability between forward-looking disclosures of the 20F form versus those of the domestic annual report. Our analysis provides empirical support for the hypotheses that these differences are significant and have a significant effect on forecast properties.

[1]  Karl V. Lins,et al.  Adrs, Analysts, and Accuracy: Does Cross Listing in the U.S. Improve a Firm's Information Environment and Increase Market Value? , 2002 .

[2]  Michelle H. Yetman,et al.  How Representative are Firms that are Cross Listed in the United States? An Analysis of Accounting Quality , 2003 .

[3]  Martin Walker,et al.  Undertaking large-scale disclosure studies when AIMR-FAF ratings are not available: the case of prices leading earnings , 2003 .

[4]  M. Walker,et al.  Share price anticipation of earnings and management's discussion of operations and financing , 1999 .

[5]  Gregory S. Miller,et al.  Accounting Choice, Home Bias, and Us Investment in Non-Us Firms , 2004 .

[6]  Erik Skaden.  Disclosure Practices, Enforcement of Accounting Standards, and Analysts' Forecast Accuracy: An International Study , 2003 .

[7]  Robert E. Verrecchia,et al.  Market liquidity and volume around earnings announcements , 1994 .

[8]  C. Leuz.  Cross listing, bonding and firms' reporting incentives: A discussion of Lang, Raedy and Wilson (2006) , 2006 .

[9]  J. Sobel,et al.  STRATEGIC INFORMATION TRANSMISSION , 1982 .

[10]  M. Harris,et al.  Differences of Opinion Make a Horse Race , 1993 .

[11]  Accounting Policy Disclosures and Analysts' Forecasts , 2002 .

[12]  R. Adler,et al.  Exploring the reliability of social and environmental disclosures content analysis , 1999 .

[13]  Michelle H. Yetman,et al.  How Representative are Cross-Listed Firms? An Analysis of Firm and Accounting Quality , 2001 .

[14]  Sean W.G. Robb,et al.  Corporate Non-Financial Disclosure Practices and Financial Analyst Forecast Ability Across Three European Countries , 2003 .

[15]  Orie E. Barron,et al.  Changes in Analysts' Information around Earnings Announcements , 2002 .

[16]  Neil D. Pearson,et al.  Differential Interpretation of Public Signals and Trade in Speculative Markets , 1995, Journal of Political Economy.

[17]  Timothy B. Bell,et al.  Auditing organizations through a strategic-systems lens : the KPMG Business Measurement Process , 1997 .

[18]  P. Elgers,et al.  The Market's Valuation of Nonreported Accounting Measures: Retrospective Reconciliations of Non-U.S. and U.S. GAAP , 1997 .

[19]  K. Schipper,et al.  Implications of Accounting Research for the SEC's Consideration of International Accounting Standards for U.S. Securities Offerings , 1999 .

[20]  Jordan I. Siegel,et al.  Can foreign firms bond themselves effectively by . . renting U.S. securities laws , 2005 .

[21]  Robert E. Verrecchia,et al.  Pre-announcement and event-period private information , 1997 .

[22]  V. Beattie,et al.  A methodology for analysing and evaluating narratives in annual reports: a comprehensive descriptive profile and metrics for disclosure quality attributes , 2004 .

[23]  Gregory B. Waymire.  ADDITIONAL EVIDENCE ON THE INFORMATION-CONTENT OF MANAGEMENT EARNINGS FORECASTS , 1984 .

[24]  J. Hassell,et al.  Why Do Managers Explain Their Earnings Forecasts , 2004 .

[25]  The Management Commentary: Comparing Narrative Outcomes from Alternative Regulatory Regimes , 2008 .

[26]  Ronald A. Dye,et al.  An Evaluation of 'Essays on Disclosure' and the Disclosure Literature in Accounting , 2001 .

[27]  Sean W.G. Robb,et al.  Nonfinancial disclosures across Anglo-American countries , 2001 .

[28]  Sergio Beretta,et al.  A framework for the analysis of firm risk communication , 2004 .

[29]  Gregory S. Miller,et al.  Earnings Performance and Discretionary Disclosures , 1999 .

[30]  M. Milne,et al.  Some determinants of social and environmental disclosures in New Zealand companies , 1996 .

[31]  David A. Guenther,et al.  Financial Reporting Environments and International Capital Mobility , 2003 .

[32]  Klaus Krippendorff,et al.  Content Analysis: An Introduction to Its Methodology , 1980 .

[33]  James W. DeLoach,et al.  Enterprise-wide risk management : strategies for linking risk and opportunity , 2000 .

[34]  Mark H. Lang,et al.  Corporate Disclosure Policy and Analyst Behavior , 1998 .

[35]  Peter M. Clarkson,et al.  Evidence That Management Discussion and Analysis (MD&A) is a Part of a Firm's Overall Disclosure Package* , 1999 .

[36]  Sean W.G. Robb,et al.  Corporate Nonfinancial Disclosure Practices andFinancial Analyst Forecast Ability AcrossThree European Countries , 2003 .

[37]  J. Hubbard.  ADRs, Analysts, and Accuracy: Does Cross Listing in the United States Improve a Firm's Information Environment and Increase Market Value? , 2003 .

[38]  Ashok Robin,et al.  Incentives Versus Standards: Properties of Accounting Income in Four East Asian Countries, and Implications for Acceptance of IAS , 2000 .

[39]  Orie E. Barron,et al.  MD&A Quality as Measured by the SEC and Analysts' Earnings Forecasts* , 1999 .

[40]  Paul R. Milgrom,et al.  Good News and Bad News: Representation Theorems and Applications , 1981 .