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Analyzing Financial Analysts
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The impact that financial analysts have on the share prices of publicly held companies has come under increasing scrutiny. However, despite the role they play in the financial markets, surprisingly little is known about the way in which analysts evaluate companies', report financial information or how they assess the quality of companies' earnings. We surveyed 34 financial analysts across 18 industries to address two issues in tandem - their use of financial information and their determination of earnings' quality. We found that analysts rely primarily on adjusted earnings figures, line of business data, reported cash flows, and the use of accounting conservatism in evaluating companies. Further, analysts regarded earnings growth, corporate growth prospects, risk, and recurring earnings as the primary determinants of quality for a company's earnings. Given these findings, it seems prudent for managers to focus corporate strategy on improving the results that are most closely inspected - i.e. earnings growth, growth prospects, reduction of financial and operating risk, and the persistence of earnings.
Keywords
Financial Analysts, Financial Reports, Earnings’ Quality
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- Arnold, J. and P. Moizer (1984), A Survey of the Methods used by UK Analysts to Appraise Investments in Ordinary Shares, Accounting and Business Research, Summer: 195-207.
- Bricker, R. G., G. Previts, T. Robinson, and S. Young (1994), Financial Analyst Assessment of Company Earnings Quality, Journal of Accounting, Auditing and Finance 541-554.
- Nelson Publications (1996), Nelson’s Directory of Investment Managers, Vol. 1.
- Port Chester, N. Y. and M. Schraeder (2001), SEC List of Accounting Fraud Probes Grows, Wall Street Journal, July 6, C1.
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