R. Ron Barniv
Kent State University
Mark Myring
Ball State University
Wayne B Thomas
University of Oklahoma
Abstract: The purpose of this study is to examine whether the legal and financial reporting environments affect the demand for accounting earnings information, as reflected in analysts relative forecast performance. To accomplish this, we test the ability of analyst characteristics to explain relative forecast accuracy across legal origins (common law versus civil law). Common law countries generally have more effective corporate governance mechanisms including stronger investor protection law and supported by inputs provided through higher-quality financial reporting systems. In this type of environment, investors are more willing to compete for superior investment decisions because they believe that they will be equitably rewarded, and investors are more likely to demand information about accounting earnings because earnings have more value relevance. The willingness of investors to participate in financial markets and their demand for earnings information increase the economic incentives for analysts to provide more accurate earnings forecasts. We predict that in common law countries analysts with superior ability and resources tend to outperform their peers because market-based incentives exist to do so. In civil law countries, where the demand for earnings information is reduced because of weaker corporate governance mechanisms and lower-quality financial reporting, we predict that analysts with superior ability and resources will not consistently provide superior forecasts. The results are consistent with our expectations and suggest that the legal and financial reporting environments affect the demand for accounting earnings information and analysts' forecast behavior. The strongest evidence of superior analysts providing superior forecasts comes from the U.S., where corporate governance mechanisms are arguably the most effective and where financial reporting has the highest quality.
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