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Abstract
This research examined whether mandated accounting disclosures affected the expectations of financial analysts and investors similarly. If the uncertainty among investors (dispersion of investors' expectations) which is unobservable could be monitored by measuring the uncertainty among analysts (change in the dispersion of analysts' EPS forecasts), accounting policymakers could evaluate their disclosures in part based on whether the uncertainty among investors was reduced.
Security analysts, like investors, are affected by information-bearing signals at two levels: individual and consensus. When individual investor's expectations are revised, transaction volumes increase while revisions in individual analyst's expectations are reflected as a change in the dispersion of analysts' EPS forecasts. When investors' expectations are revised at the consensus level, security prices change, while a revision of analysts' consensus expectations change the mean of the analysts' EPS forecasts.
To test the similarity of analysts' and investors' expectations a joint hypothesis was tested. The first hypothesis was that financial accounting disclosures which did not affect investors' expectations should not affect analysts' expectations. The second hypothesis was that a financial accounting disclosure which revised investors' (analysts') expectations should also revise analysts' (investors') expectations.
The first hypothesis was tested by measuring analysts' reactions to the release of replacement cost data required by ASR 190. The test results, which found no significant reaction by analysts were consistent with previous research which indicated investors' expectations were not revised by ASR 190's data.
The second hypothesis was tested by measuring both analysts' and investors' reactions to the release of SEC mandated line-of-business disclosure. The results suggested neither analysts' nor investors' expectations were revised.
The conclusion of this research was that mandated accounting disclosures which did not affect investors' (analysts') expectations did not affect analysts' (investors') expectations. However, whether mandated accounting disclosures which affect investors' (analysts') expectations also affect analysts' (investors') expectations remains unresolved. Therefore, this research provided only partial support for the hypothesized analyst-investor relationship.
