The impact of managerial tools on meeting or beating analyst forecasts, analyst reactions, and information asymmetry

: evidence from the UK

Abstract

Since 2005, listed firms in the UK have been required to adopt the International Financial Reporting Standards (IFRS) to meet international accounting standards requirements. Policymakers expected that the adoption of IFRS would lead to increased transparency and would improve financial reporting quality. Despite a number of studies conducted in the UK examining the impact of these standards on managerial tools, there is a lack of empirical evidence on how managers meet or beat analyst forecasts post-IFRS. The issue is that managers intentionally target analyst earnings estimates; however, whether analysts are motivated to collaborate with managers to benefit each other is an interesting question that remains unanswered in the literature.

The significance of this relationship has an impact on the level of information asymmetry in financial markets. This managerial practice is more likely to influence investor trading behaviour, as inside information gives investors an advantage and helps them to maximise profit. This thesis is essential as it links three market players, managers, analysts and investors, in order to provide empirical evidence regarding the impact of these managerial tools on the UK market. Therefore, this thesis was guided by the following objectives: to investigate the tools that managers use to meet or beat analyst forecasts in the UK post-IFRS, how analysts react to this myopic managerial practice, and how managerial tools influence levels of information asymmetry. This study employed a quantitative approach and applied panel data for 280 firms listed in the FTSE All-Share Index between 2005 and 2015.

Based on analysis of panel multivariate regressions, the results show that UK managers prefer to use real earnings management and managerial guidance tools to hit analyst forecasts. Furthermore, the results show that analysts prefer to be guided by managers in order to maintain their relationship with management. This might indicate that analysts rely on managers to form their forecasts, and avoid annoying managers in order to retain this good association. The study also shows a positive association between real earnings management and information asymmetry. The evidence reveals that managers use this tool to mislead investors. The results of this thesis are consistent with the theoretical framework, which posits that managers engage in various managerial tools to maintain their own interests rather than shareholders’ interests (agency theory). In order to maintain a good relationship with management, analysts make irrational decisions when forecasting firms’ earnings to avoid the negative consequences of their current decisions (prospect theory). However, this managerial practice leads to increase information asymmetry among investors. Thus, the research has an interesting practical implication: IFRS adoption eventually increases comparability among countries but does not improve the quality of UK financial reporting. The UK regulator should intervene to monitor the integrity of financial reporting and request further voluntary accounting information be published for investors. Furthermore, external auditors should be more active and should perform sceptical audits, which requires designing procedures that challenge management assertions.

Date of Award	Dec 2018
Original language	English
Awarding Institution	University of Brighton
Supervisor	Rob Hayward (Supervisor) & Yasser Eliwa (Supervisor)