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E-ISSN : 2288-2766
Foreign Income Growth and Analyst Forecast Optimism
He Soung Ahn
Abstract
Purpose – The international market provides a growth momentum for firms by tapping into a new market. Given information asymmetry between firms and financial analysts, firms’ international growth can be perceived as a higher business prospect by analysts. Hence, this paper explores the possibility of analysts’ over-emphasis on foreign income growth in predicting the firm’s earnings. Research design and methodology – We utilize a sample of U.S. firms to test the relationship between foreign income growth and analysts’ forecast optimism. Our initial sample is all publicly listed and traded U.S. firms for years between 1976 and 2016. Data on analysts’ earnings forecasts are collected from the I/B/E/S database, and accounting-based financial variables are collected from the Compustat database. Our final sample consists of 6,120 firm-year observations. Results – Empirical analyses show that firms that show higher international growth in earnings are likely to face forecast inaccuracy by a financial analyst. From the perspective of firms, their earnings are less than what analysts forecasted. Contrary to our prediction on the moderating effect of innovative capabilities, optimistic bias is not intensified – rather, it is reduced – when firms have higher innovative capabilities. Conclusions – Our results imply that analysts favor firms with higher international growth, but innovative capability on the international market is not guaranteed and adds additional risks to the firm’s operation.
- keywords
- Foreign Income, Analyst Forecast, Innovative Capability
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