Do Analysts Understand the Valuation Implications of Accounting Conservatism when Forecasting Target Prices?

Conservatism in earnings does not have a direct impact on the present value of future cash flows. This paper examines whether financial analysts correctly undo the effect of accounting conservatism incorporated in their own earnings forecasts in arriving at their target price forecasts. Based on pri...

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Main Authors: KIM, Jae Bum, Nekrasov, Alexander, Shroff, Pervin K., Simon, Andreas
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Language:English
Published: Institutional Knowledge at Singapore Management University 2012
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Online Access:https://ink.library.smu.edu.sg/soa_research/894
https://ink.library.smu.edu.sg/context/soa_research/article/1893/viewcontent/conf13kim.pdf
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spelling sg-smu-ink.soa_research-18932018-07-13T06:02:21Z Do Analysts Understand the Valuation Implications of Accounting Conservatism when Forecasting Target Prices? KIM, Jae Bum Nekrasov, Alexander Shroff, Pervin K. Simon, Andreas Conservatism in earnings does not have a direct impact on the present value of future cash flows. This paper examines whether financial analysts correctly undo the effect of accounting conservatism incorporated in their own earnings forecasts in arriving at their target price forecasts. Based on prior findings, we consider alternative valuation models/heuristics that may be used by analysts to estimate target prices, e.g. the forward P/E and the PEG ratio. Our evidence suggests that analysts fail to fully undo the effect of accounting conservatism embedded in their forecasts of earnings and earnings growth when estimating their target price forecasts. More sophisticated analysts undo the effect of conservatism to a greater extent than other analysts, although their target price forecasts also exhibit conservatism-induced bias. In contrast, the market on average appears to correctly unravel the conservatism in future earnings when pricing securities. However, for extreme levels of conservatism, our evidence suggests that the under/over-statement of target prices leads to a distortion of market prices. 2012-08-01T07:00:00Z text application/pdf https://ink.library.smu.edu.sg/soa_research/894 https://ink.library.smu.edu.sg/context/soa_research/article/1893/viewcontent/conf13kim.pdf http://creativecommons.org/licenses/by-nc-nd/4.0/ Research Collection School Of Accountancy eng Institutional Knowledge at Singapore Management University Accounting Portfolio and Security Analysis
institution Singapore Management University
building SMU Libraries
continent Asia
country Singapore
Singapore
content_provider SMU Libraries
collection InK@SMU
language English
topic Accounting
Portfolio and Security Analysis
spellingShingle Accounting
Portfolio and Security Analysis
KIM, Jae Bum
Nekrasov, Alexander
Shroff, Pervin K.
Simon, Andreas
Do Analysts Understand the Valuation Implications of Accounting Conservatism when Forecasting Target Prices?
description Conservatism in earnings does not have a direct impact on the present value of future cash flows. This paper examines whether financial analysts correctly undo the effect of accounting conservatism incorporated in their own earnings forecasts in arriving at their target price forecasts. Based on prior findings, we consider alternative valuation models/heuristics that may be used by analysts to estimate target prices, e.g. the forward P/E and the PEG ratio. Our evidence suggests that analysts fail to fully undo the effect of accounting conservatism embedded in their forecasts of earnings and earnings growth when estimating their target price forecasts. More sophisticated analysts undo the effect of conservatism to a greater extent than other analysts, although their target price forecasts also exhibit conservatism-induced bias. In contrast, the market on average appears to correctly unravel the conservatism in future earnings when pricing securities. However, for extreme levels of conservatism, our evidence suggests that the under/over-statement of target prices leads to a distortion of market prices.
format text
author KIM, Jae Bum
Nekrasov, Alexander
Shroff, Pervin K.
Simon, Andreas
author_facet KIM, Jae Bum
Nekrasov, Alexander
Shroff, Pervin K.
Simon, Andreas
author_sort KIM, Jae Bum
title Do Analysts Understand the Valuation Implications of Accounting Conservatism when Forecasting Target Prices?
title_short Do Analysts Understand the Valuation Implications of Accounting Conservatism when Forecasting Target Prices?
title_full Do Analysts Understand the Valuation Implications of Accounting Conservatism when Forecasting Target Prices?
title_fullStr Do Analysts Understand the Valuation Implications of Accounting Conservatism when Forecasting Target Prices?
title_full_unstemmed Do Analysts Understand the Valuation Implications of Accounting Conservatism when Forecasting Target Prices?
title_sort do analysts understand the valuation implications of accounting conservatism when forecasting target prices?
publisher Institutional Knowledge at Singapore Management University
publishDate 2012
url https://ink.library.smu.edu.sg/soa_research/894
https://ink.library.smu.edu.sg/context/soa_research/article/1893/viewcontent/conf13kim.pdf
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