Senders’ Information Quality Problem or Receivers’ Reading Comprehension Problem? Security Analysts’ Deviation of Recommendation from Their Concurrent Eps Forecasts

This research project aims at the deviation between the earnings forecasts and the investmentrecommendations. Extant accounting and finance studies perceive the security analysts as the majorinformation intermediaries, providing earnings forecasts that add to the fundamental valuation analysisconducted by investors in the capital market. Yet there exists deviation between the earnings forecasts andthe investment recommendations provided by the same security analysts at the same date. The potentialfactors that potentially help explaining such deviation may warrant an in-depth investigation. In contrast withprior research work, which focuses on the strategic conducts of brokerage firm analysts, this study aims toposit and examine whether and the extent to which (1) investment in long-term (non-current) assets and/or (2)non-recurring accounting items of Income from Continuing Units has marginal explanatory power for thedeviation in recommendations from earnings forecasts. Specifically, regarding the long-term investment inassets, this study plans to investigate (1) whether the investors for firms with greater uncertainty in the futurebenefits of their long-term investment in assets rely more heavily on analysts’ interpreting the implication ofearnings and other financial report items, and (2) whether the deviation in recommendations from earningsforecasts may be explained by the uncertainty in the future benefits of firms’ long-term investment in assets,especially the more capable security analyst. As for the non-recurring accounting items of Income fromContinuing Units, this study plans to investigate (1) whether the investors for firms with greaternon-recurring accounting items of Income from Continuing Units rely more heavily on analysts’ interpretingthe implication of earnings and other financial report items, (2) whether the deviation in recommendationsfrom earnings forecasts may be explained by the non-recurring accounting items of Income from ContinuingUnits, and (3) whether non-recurring accounting items of Income from Continuing Units helps explainforecasts errors in forecasts provided by security analyst, especially the more capable security analyst.