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The effectiveness of the PEG ratio as a valuation tool has been a topical debate between market commentators ever since being popularised by Lynch (1989). This study examines the appropriateness of the fair value criteria of 1.0 (PEGL) in comparison with a time-series based share specific benchmarking model (PEGT). Furthermore, influencing factors of analyst forecasting accuracy, namely: the number of analyst contributions, forecast dispersion and forecast horizon, were tested and compared using sub-set portfolios for each category with the objective of identifying a possible optimal PEG trading rule strategy. The outcome showed a consistent outperformance of PEGT portfolios compared to PEGL portfolios and the market benchmark. Unexpected results were obtained for the impact of analyst forecasts on the performance of the PEG ratio with additional literature review providing possible reasons that analyst optimism may have a more influencing impact on the PEG ratio than forecasting accuracy. Finally, an optimised PEG trading rule strategy delivered annual abnormal returns of 5.4% (CAGR: 19.7%) for a PEGL portfolio, versus that of 13.7% (CAGR: 28.5%) for a PEGT portfolio. The ensuing methodology appeared to single out small cap firms with above market growth prospects. Copyright / Dissertation (MBA)--University of Pretoria, 2010. / Gordon Institute of Business Science (GIBS) / unrestricted

Evidence that firms adjust accruals to just meet or beat analyst forecasts is pervasive. However, the implications for earnings quality are not clear. Managers can use this practice either to mislead investors, resulting in lower quality earnings, or to signal future earnings growth and thereby improve the decision usefulness of earnings. Assuming that boards are concerned about providing higher quality financial information and that they can discern the proper earnings signal, they should discourage managers from adjusting earnings to beat the analyst forecast target if such adjustment diminishes earnings quality. Consistent with this prediction, I find a significantly negative relation between the probability that a firm beats the target by adjusting accruals and the presence of at least one independent audit committee financial expert for firms with poor future performance. I also find that the negative impact of an independent financial expert on the odds of beating the target by adjusting accruals is significantly stronger for firms with poor future performance than for firms with strong future performance. These findings are consistent with financial expertise on the audit committees improving corporate governance by protecting shareholders from accruals management that reduces the decision usefulness of earnings.

This dissertation consists of three essays. In the first essay, we attempt to answer the following three questions about the new capital raised in IPOs: Why do some IPO companies raise a lot of new capital while some others don’t? Where do the IPO companies use the new capital they raise in IPOs? How does the use of new capital affect the operating performance of IPO companies? We find that companies with higher R&D spending, higher capital expenditure, lower working capital and more long term debt tend to raise more capital in IPOs. These firms also spend more on R&D and capital expenditure. The more new capital firms raise in IPOs, the lower sales growth rate they have. However, firms spending a higher proportion of new capital on R&D seem to have higher sales growth rate. In the second essay, we examine the relation between IPO valuation and offering size. Using a sample of 3,885 IPOs from the US, we find that IPO firms with larger offering size have lower valuation. Both primary share offering and secondary share offering are negatively related to IPO firm valuation. The valuation measures are positively related to the levels of capital expenditure and R&D before IPO, lending support to explanations based on Jensen (1986)’s free cash flow hypothesis. We also find evidence consistent with negative signals from larger secondary share offering size. Results of tests about long run IPO stock performance do not support the hypothesis that IPO stock demand curve is downward sloping. In the third essay, we examine how analysts react to IPO offering size. We find that analysts predict lower long-term growth rates for IPOs with larger offering size. The sizes of both primary and secondary offering are negatively related to long-term growth rate forecasts. We find evidence that the free cash flow effect may be related to the negative relation between primary offering size and growth forecast.

This dissertation examines the general research issue of whether the components of earnings are informative and specifically 1) how analysts consider earnings components when predicting future earnings and 2) whether the information content in, and analysts’ use of, earnings components have changed through time. Although earnings components have predictive value for future earnings based on each component’s persistence, extant research provides only a limited understanding of whether and how analysts consider this when forecasting. Using an integrated income statement and balance sheet framework to estimate the persistence of earnings components, I first establish that disaggregation based on the earnings components framework in this study is helpful to predict future earnings and helps explains contemporaneous returns. I then find evidence suggesting that although analysts consider the persistence of various earnings components, they do not fully integrate this information into their forecasts. Interestingly, analysts appear to be selective in their incorporation of the information in earnings components, seeming to ignore information from components indicating lower persistence, which results in higher forecast errors. Conversely, when a firm’s income is concentrated in high persistence items, analysts appear to incorporate the information into their forecasts, reducing their forecast errors. I also report that the usefulness of components relative to aggregate earnings has dramatically and continuously increased over the past several decades, and contemporaneous returns appear to be much better explained by earnings components than aggregate earnings (than historically). Finally, the relation between analyst forecast errors and the differential persistence of earnings components has also declined over time, indicating that analysts appear to recognize the increasing importance of earnings components through time. / text

This study examines the determinants of the use of uncertain and weak modal words in 10-K filings and the effect of these words on analyst forecast attributes. I find that the use of uncertain and weak modal words in 10-K filings is positively (negatively) associated with firm size, volatility of business and operations (firm age and number of business segments). More importantly, after controlling for readability and management tone, I find that the use of uncertain and weak modal words in 10-K filings is associated with greater analyst following, lower forecast dispersion, greater forecast accuracy, and lower uncertainty in analysts’ overall and common information environment. The results of this study provide more insights into why management uses uncertain and weak modal words in 10-K filings and how these words in 10-K filings affect analysts’ behavior and their forecast outcomes.

The post earnings announcement drift is a market anomaly causing a firms cumulative abnormal returns to drift in the direction of an earnings surprise. By measuring quarterly earnings surprises using two measures. The first based upon a times series prediction and the other based upon on analyst forecast errors. This study finds evidence that the drift ex-ists in Sweden and that investor’s systematically underreacts towards positive earnings sur-prises. Further this study shows that the cumulative average abnormal returns is larger for surprises caused by analyst forecast errors. While previous studies have tried to explain the drift by taking on additional risk or illiquidity in the stocks. This study provides evidence supporting that investors limitations in weighting new information causes an underreaction, hence a drift in the stock prices.

I investigate how career concerns influence banking analysts’ forecasts and find that banking analysts issue relatively more optimistic forecasts early in the year and more pessimistic forecasts later in the year for banks who could be their future employers. This pattern is not observed when the same analysts forecast earnings for banks with no equity research departments. Using the Global Settlement as an exogenous shock on career concerns, I show that this forecast pattern is pronounced after the Settlement. Moreover, I find that analysts benefit from this behaviour as analysts that are more biased in their forecasts towards potential future employers are more likely to move to a higher reputation bank. Textual analysis of analyst reports is also valuable due to the private information and analysis conveyed in the text. Second paper therefore examines analyst reports with consistent and conflicting signals in terms of qualitative and quantitative outputs. I find that investors react more strongly when the sentiment and earnings forecast bias are consistent. Interestingly, when the tone of report text does not coincide with the earnings forecast, investors place greater weight on the text rather than the EPS forecasts. I also find that consistent reports with both optimistic sentiment and forecast bias have a strong positive market reaction but they are low in forecast accuracy. Markedly, forecasts with pessimistic sentiment have higher accuracy than those of optimistic sentiment. Hence, pessimistic sentiment is a good indicator of the quality of forecast reports. Finally, in my last paper, I explore whether there is any association between firm-specific investor sentiment and the subsequent tone of firms' quarterly reports. Firm-specific investor sentiment is measured using the methodology from Aboody et al. (2016), which proxies for market confidence relating to a specific firm. Given the potential cost-benefit trade-off in the reporting strategy, I argue and find different responses from managers in their 10-Qs in terms of their investor sentiment. I focus on the tone of optimism, readability and the proportion of uncertain words in the 10-Q filings. For firms with extremely high levels of investor sentiment, managers tend to be more conservative by using less optimistic words to avoid future disappointment. In comparison, in firms with extremely pessimistic investor sentiment, managers tend to use more optimistic and easy to understand language, and minimize their proportion of uncertainty in their 10-Q filings. By doing so, perhaps they are trying to alter their investor sentiment.

The beginning of the 21st century was plagued with unprecedented instances of corporate fraud. In an attempt to address apparent non-existent or “broken” corporate governance policies, sweeping measures of financial reporting reform ensued, having specific requirements relating to the composition of audit committees, the interaction between audit committees and external auditors, and procedures concerning auditors’ assessment of client risk. The purpose of my dissertation is to advance knowledge about “good” corporate governance by examining the association between meeting-or-beating analyst forecasts and audit fees, audit committee compensation, and audit committee tenure and “busyness”. Using regression analysis, I found the following: 1) the frequency of meeting-or-just beating (just missing) analyst forecasts is negatively (positively) associated with audit fees, 2) the extent by which a firm exceeds analysts’ forecasts is positively (negatively) associated with audit committee compensation that is predominately equity-based (cash-based), and 3) the likelihood of repeatedly meeting-or-just beating analyst forecasts is positively associated with audit committee tenure and “busyness”. These results suggest that auditors consider clients who frequently meet-or-just beat forecasts as being less “risky”, and clients that frequently just miss as being more “risky”. The results also imply that cash-based director compensation is more successful in preserving the effectiveness of the audit committee’s financial reporting oversight role, that equity-based compensation motivates independent audit committee directors to focus on short-term performance thereby aligning their interests with management, and that audit committee director tenure and the degree of director “busyness” can affect an audit committee member’s effectiveness in providing financial reporting oversight. Collectively, my dissertation provides additional insights regarding corporate governance practices and informs policy-makers for future relevant decisions.

達成或超越分析師的盈餘預期為公司重要目標之一，市場包括投資人或分析師對於公司達成盈餘預期目標的反應，一直為學界所關心。文獻發現達成盈餘預期目標的公司，確實享有較未達成目標者更高的股價報酬，顯示市場對此持有正面的反應，因為達成目標的公司，未來將有較佳的獲利能力。本文延伸文獻之探討，進一步考量經濟環境因素---景氣反轉，在這一議題上可能扮演的角色，亦即試圖探討景氣反轉時市場對公司達成或超越分析師盈餘預期的反應，以及達成盈餘預期目標的資訊內涵，會如何受到景氣反轉因素的影響。 實證結果發現達成或超越分析師盈餘預期事件所帶來的股價反應，不會受到景氣由上往下反轉的影響而有所差異，但分析師對此等事件的反應則會隨景氣由上往下反轉而更為強烈，在景氣由下往上反轉時則較無差異；至於此等事件所隱含公司未來將有較佳獲利能力的資訊內涵，雖不會隨著景氣由上往下反轉而有所差異，卻會隨著景氣由下往上反轉而更為增強。 / Meeting or beating analysts’ earnings forecasts is an important goal for the management to achieve. As a result, the market reaction to the meeting of earnings expectations has been intensively explored. In general, the meeting of earnings expectations signals brilliant future profitability to the investors. Following this line of research, this study further investigates the effect of business cycle on the relationship between market reaction and the meeting of earnings expectations. We find that the stock returns of firms meeting or beating analysts’ forecasts are not affected by the sudden downturn of the economy. On the contrary, analysts’ response to such events becomes stronger in the economic downturn though it remains the same when the economy rebounds. As for the issue of information content, meeting earnings expectations is more informative when the economy rebounds from recession but not in the downturn of the economy.