The ODA Section invites you to a seminar where Ingolf Kloppenburg, University of Turku, will give the following presentation:

To Rely, or not to Rely? Sell-Side Financial Analysts and Low Earnings Quality

Abstract
There is a gap in the literature enlightening how analysts, as intermediators and sophisticated capital market actors (Palepu et al., 2022), are affected by low earnings quality in an environment characterized as high-scrutiny (Samuels et al., 2021). Our aim is to reduce this gap. Our curated dataset originates from the Securities and Exchange Commission (SEC) and consists of misrepresenting firms during the years 1991-2013. These firms have been apprehended by the US authorities deliberately altering their financial statements. Hence, it can be inferred that the earnings quality is very low. We take advantage of the ex post knowledge that misrepresented annual reports have a low earnings quality. We test the impact of the low earnings quality on sell-side financial analysts before the low earnings quality is officially announced by the SEC. The impact on analysts is measured by three factors commonly employed in prior literature: i) change in the mean and median earnings forecast, ii) change in the standard deviation of the earnings forecast among the analysts, and iii) change in the number of analysts following a firm. The results indicate, with all the applied measures, that analysts are misled by misrepresentations. The results contribute to the literature by shedding light on the analysts’ actions in the context of low earnings quality. From the legislative perspective, our results highlight the importance of an independent and timely market monitoring function. This function, in turn, would further an undistorted information supply and also support the work of analysts. Ultimately, as a result of this, the efficient allocation of capital would be enhanced.

Keywords: Financial Analysts, Financial Misrepresentation, Earnings Quality, Accounting Fraud, AAER

Everyone is welcome!