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Jeffrey P. Katz, Ph.D. Department of Management Kansas State University Manhattan, Kansas 66506 785-532-7451 785-532-7024 (fax) firstname.lastname@example.org Marilyn T. Zarzeski, Ph.D., CPA School of Accounting University of Central Florida Orlando, FL H. John Hall, Ph.D. Department of Management University of Florida Gainesville, FL
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We gratefully acknowledge the contribution of I/B/E/S International, Inc. for providing earnings per share forecast data through the Institutional Brokers' Estimate System
The Impact of Strategy, Industry and Culture on Forecasting the Performance of Global Competitors: A Strategic Perspective Abstract This study examines how business strategy, industry competitive environment and national culture affect the accuracy and level of agreement among financial analysts who predict the future earnings of international competitors. Recent research has reported the increasing importance played by financial analysts regarding the stock price and market value of firms since analysts' forecasts of performance have been found to significantly affect the cost of capital, valuation and stock price changes of firms. As the incidence of cross-national mergers and acquisitions continues to escalate, understanding factors that systematically affect performance predictions becomes increasingly important, especially for firms employing cross-national merger or acquisition strategies. We find that business strategies affect the accuracy of analysts' performance estimates while national culture plays an important role in determining the level of agreement among analysts' predictions. Implications for international management practitioners and researcher are discussed.
The Impact of Strategy, Industry and Culture on Forecasting the Performance of Global Competitors: A Strategic Perspective
Background The field of strategic management spans the boundaries between traditional functionallyrelated business fields, such as economics, finance, marketing and accounting, by focusing on top management decisions that have long-term impact on the future success of the firm (Andrews, 1987; Porter, 1985). The most commonly cited factor linking strategic management with these fields is the financial market outcome of the firm. That is, describing how Astrategic@ factors, that generally focus on the external environment of the firm, affect the performance of the firm was the primary motivation for the development of dominant early models in strategic management (Hofer, 1975). For example, Porter's (1980) well-known model of competition serves as a basis for assessing the relative impact that key external factors, such as buyers, suppliers and rivals, have on competition within a particular industry. Thus, strategic management historically has sought to address how contingent factors from the firm=s external environment, and resulting decisions made within the firm, systematically affect financial performance differences among direct competitors (Jauch, Osborn & Glueck, 1980). More recently, research in strategic management (Venkatraman & Ramanujam, 1986), behavioral finance (Olsen, 1998) and financial accounting (Das, Levine & Sivaramakrishnan, 1998; Schipper, 1991; and Dreman & Berry, 1995) attempts to expand our understanding of the factors affecting the prediction of future firm performance, with particular emphasis on the accuracy of indicators predicting future firm performance. This interest is increasing in importance as a strategic focus because understanding the factors affecting the accuracy of the firm=s future earnings is key to understanding the firm=s future valuation, cost of capital and the relationship between earnings
For example. In previous research. factors affecting the accuracy of performance predictors have a direct impact on the strategic alternatives available to firm managers. Thus. can be anticipated by managers and investors thus limiting the potentially negative impact on firm value (Rivera. prior period earnings. 1978). By understanding the factors affecting financial analysts' predictions of future firm performance. changes in financial analysts' beliefs. Mann (1998) recently reported the market value decline of one company by 24 percent in one day due to differences between financial analysts' estimates of the firm=s earnings and the announcement by management of actual earnings. Successful mergers and acquisitions are based on securing cost-effective capital through debt or equity markets (Abolafia. . 1996. imputed accuracy of earnings estimates was found to significantly explain investors= beliefs about the future performance in the value of both a company and its stock price (Patell. determining the factors that systematically affect analysts' earnings estimates is increasingly important to investors and creditors. Shefrin & Statman. 1988). Thus. since capital markets value the information content of analysts= earnings estimates. 1993).and stock prices (Brown & Rozeff. and related changes in stock prices. stock price and cost of capital affect management=s ability to implement broad competitive strategies. the impact of performance estimates has become linked to the strategic decisions of top company managers. 1991). or slightly less than. 1998). The recent attention on the importance of performance estimates has resulted in the popular business press investigating the role of financial analysts and their estimation accuracy (Bartlett. such as expanding the firm through mergers or acquisitions (Barton & Gordon. 1976). Despite the company=s announcement that earnings would be equal to. The potential implication for the strategic management of the firm is significant. financial analysts had incorrectly predicted substantial earnings changes. Market valuation. That is.
Extending firm performance estimation to the global marketplace. we seek to gain a greater understanding of the factors affecting performance predictions of global firms. industry competitive environments. we examine estimated firm performance based on the model tested by Katz. several recent high-profile cross-national mergers. Woodruff. such as Chrysler and Daimler-Benz. Peterson & Spiro. business strategies. They suggest that performance projections by analysts may be less accurate for global competitors than for domestic firms. recent studies have begun examining the factors contributing to the accuracy of performance estimates across global competitors. Kerwin. Specifically. despite the assertion that approximately one-third of "quantitative" investors rely on performance estimates for international competitors. In this study. industry environments and national culture on actual firm performance. We develop and test a model predicting accuracy and agreement among analysts' estimates of future earnings that assesses the impact of three important information sources: 1. Speidell and Ramos (1998) recently questioned whether international estimates of global competitor performance are useful in making strategic decisions. Our study seeks to extend several related works in this area. While noting that differences exist between performance forecasts for firms based in different countries. have been the focus of analysts' earnings forecasts (Vlasic. In addition. Zarzeski and Hall (1997) who examined the effect of business strategies. and 3. For example. national cultures. Second. First. 1998). 2. Spidell and Ramos offer no systematic explanation why such differences exist. we seek to extend Rivera's (1991) work by decomposing the industry competitive environment into specific task environments and assessing their impact on the accuracy and level of agreement of earnings predictions across global . we investigate the causes of "errors" in financial analysts' estimates and the causes of dispersion (systematic disagreement) among financial analysts' estimates of earnings across global competitors.
The next section presents the literature relating to forecast accuracy (analysts' forecast error) and level of agreement (forecast dispersion). the more accurate the earnings prediction. track financial analysts' earnings estimates for over 17. Literature Prediction of Performance Financial researchers and professionals agree that earnings are a major determinant of stock prices (Calderon. 1993).competitors. there is little empirical evidence explaining . By considering the effects of national culture. Section four presents the results of our empirical tests while section five discusses our results and offers implications for international management practitioners and researchers. 1981. industry environment and business strategies on analysts' predictions of firm performance. the more information content the forecast carries (Elton. 1995). The third section presents the methodology developed to operationalize and test the research hypotheses. A significant portion of the research budget of investment bankers and brokerage houses is spent on compensating top financial analysts who claim the ability to accurately estimate the earnings of firms. national culture. Professional analysis services. 1984). we find that business strategies are an important factor in determining the accuracy of analysts= earnings predictions while national culture plays an important role in the level of agreement among analysts' earnings predictions. Although the related literature since the late 1960's clearly suggests that analysts consistently misforecast earnings. Modern security analysis is the attempt by analysts to predict stock price movements by accurately estimating near-term firm performance (Dreman & Berry. Gruber & Gultekin. such as Institutional Broker's Estimate System (IBES).000 firms worldwide. Because earnings forecasts have information content of importance to the marketplace. industry environment and business strategy.
Richardson and Schwager (1987) examine the general concepts that underpin analysts' forecasts but do not examine the specific nature of firm. managers are able to weigh the impact of such factors on the future earnings estimations and the likely financial market reaction. 1984). 1981). The level of agreement. For example. are affected by different market risks than purely U. However. domestic firms (see for example. Understanding what causes the errors in analysts' earnings forecasts is important to the corporate strategies available to the firm. industry or decision settings (strategies) that inherently impact financial analysts' decisions (Schipper. or dispersion. the search for bias in earnings predictions continues with limited investigation into prediction accuracy of MNCs (Rivera. Since the mid-1970's numerous authors have identified the multinational corporation (MNC) as a target for corporate strategy through portfolio diversification because MNC's. and the context (environment) in which the firm being assessed competes. 1974 and Fatemi. Solnik. Therefore. Thus. 1991). 1996). by understanding the sources of estimation bias. among analysts' estimates of earnings is an area of related interest. if analysts with access to the same sources of information make different interpretations. then their estimates of earnings will tend to be similar. Forecast dispersion also carries important information to the marketplace (Elton. Thus. especially across countries.the bases for the errors. 1991). It has been .. then their level of disagreement (forecast dispersion) of estimates will be higher (Lang & Lundholm. and interpret the information in the same manner. Brown. Schipper (1991) suggests that examining the types (financial as well as strategic) of information available to analysts. If analysts have access to the same information. domestic firms wishing to diversify their risk may seek to acquire firms in other countries but have relatively limited information about future earnings of such firms. particularly those headquartered in foreign countries. et al. will potentially provide useful information about the accuracy of earnings estimates.S.
complexity. thereby developing objective measures of the three dimensions comprising the firm's competitive environment. 1985. . relative market instability.. 1987. Dess and Beard found systematic differences in the relationship between a firm's allocation of resources (strategies) and its competitive environment. That is. 1984). The firm's competitive environment was initially characterized by industry munificence--a concept meant to reflect the relative growth rates of industries over time. For 52 industries. Lee & Ulgado. 1993). Using objective measures. Dess and Beard (1984) empirically tested the three dimension model of the competitive environment by using standard industrial classifications (SIC) for measuring the three industry constructs. Dess and Beard developed factor scores and ranks on munificence. investigating the forces impacting analysts' forecast accuracy and dispersion will provide important information to investors and managers about potential systematic differences in firm earnings and risk. Thus. The Industry Competitive Environment The strategic management literature initially focused attention on industry factors affecting the firm's potential for sustaining sales growth (Hofer. Environmental complexity is meant to describe the level of uniformity/heterogeneity of firms within an industry while environmental dynamism addresses the variability of industry growth. The three dimensions of the competitive environment form the context in which competitive strategies of the firm are developed and implemented (Hambrick & Lei.argued that higher levels of disagreement indicate higher levels of systematic risk (Conroy & Harris. et al. 1975). that is. Elton. Aldrich (1979) expanded the description of the competitive environment by adding two dimensions--complexity and dynamism. Lee. an industry with a high level of munificence would be one in which firms are able to enter and maintain competitive positions with relative ease. and dynamism.
1985. 1987). 1985. firms use their resources to develop strategies for competition in their marketplace which. McArthur and Nystrom (1991) examined the direct and moderating effects of the industry competitive on the strategy-performance relationship. complexity and dynamism. Thus. 1980). A strategy framework receiving considerable theoretical and empirical attention is the structure-strategy-performance model (Scherer. in turn. or more difficult. because industry effects across global competitors are difficult to predict. 1974. Porter. Firm managers that are able to effectively match the business strategies of the firm with the competitive environment will be rewarded by enhanced firm performance. McArthur and Nystrom argued that the business environment modifies the form of the strategy-performance relationship. Andrews. Hambrick & Lei. affects the firm's financial performance (Porter. They selected their sample of industries from Dess and Beard's (1984) study and found evidence that the competitive environment significantly interacts with strategies to affect performance. The Role of Firm Strategy Within the constraints imposed by the industry's competitive environment. we control for the effects of the industry competitive environment on the strategies adopted by the firm (Prescott. to track by financial analysts as suggested by Rivera (1991) and Porter (1990). 1970. we control for the effects of the competitive environment by employing Dess and Beard's objective measures of the competitive environment to account for differences in industry munificence. They recommended the use of all three industry competitive environment dimensions . The result is that all industries in our study are placed on a level field relative to any special factors that might make certain industry competitors easier.In the current study. This framework proposes that the performance of a company depends on the strategies undertaken within a particular industry's competitive structure. Extending the work of Porter (1980). Caves. 1986). Gale & Porter.
They found that firm performance is affected by the business strategies of the firm while holding industry and national culture constant across firms. a measure of financial leverage. Etheridge and Noland (1994) suggested that performance indicators of international firms possess a higher degree of informational complexity than domestic firms. and sales growth. a measure of intent to dominate the industry (Katz. affect firm performance (Hofer. Hambrick. Strategies included in the current study are: inventory turnover. Therefore. or indirectly. Katz. we believe that firm strategies will be systematically related to financial analysts' earnings forecasts. 1986). . 1975. The Role of National Culture In the global marketplace the strategy-performance link may be affected by national culture. 1983). capital intensity. et al. 1997). research intensity. a measure of investment in research and development as a basis for competitive advantage. et al. Recently. examining the role that business strategies play on the estimation of earnings will help increase the information content of performance predictions for global competitors (Shaked. financial slack. We chose these business strategies because they have been shown to reflect management's allocation of resources to the firm's competitive posture toward other firms in the same industry and the measures are accounting-based thus available to financial analysts who track the performance of the firm. Cheng. a measure of firm efficiency. (1997) extended the work of McArthur and Nystrom (1991) by assessing the effects of strategy.in future studies of strategy-performance.. industry and national culture on the performance of global competitors. a measure of management's decision to maintain uncommitted financial resources for potential market opportunities. The current study examines business strategies in relation to financial analysts= predictions of firm performance (earnings). Because business strategies directly.
since national culture affects the strategies and performance of the firm (Osland & Cavusgil. Barrett. Individualism refers to the tendency of people to look after themselves while collectivism is the belief in the importance of group decision-making. Numerous studies have shown that financial reporting practices of firms differ across cultures (Choi. A weak technical imperative. Hofstede developed a numeric classification scheme for national cultures. Hofstede's theory of national culture predicts that culture will significantly affect business strategies as vehicles to achieve organizational success. 1973. Through empirical study. such as assertiveness and materiality. power distance and uncertainty avoidance. uncertainty avoidance is the extent to which people feel threatened by ambiguity in the workplace. while femininity emphasizes concern for others and for the quality of life. Masculinity is the degree of traditional masculine values. would be the development and implementation of strategies used to accomplish the firm's competition goals. For example. Hofstede (1980) defined culture as the collective mental "programming" of the people in a national context. norms and beliefs. affects the growth strategies and performance of firms in the international banking industry. Werner and Brouthers (1998) empirically tested a model predicting the importance of culture on business goals. masculinity-femininity. for example. Hofstede (1983) suggests that national culture influences those areas where technical imperatives are weakest. particularly individualism/collectivism. 1992). Katz. Thus. In this context.which stems from a country's values. Finally. Recent research supports this contention. Power distance is the level of acceptance by a society for the unequal distribution of power in organizations. 1976. 1996). Adhikari & Tondkar. it is likely that national culture will affect the ability to predict the future performance of the firm. . The four cultural dimensions resulting from his research are: individualism-collectivism. They demonstrated that national culture.
no study has examined the relationship between national culture. there is evidence to suggest that national culture. Recently. 1979). Therefore. However. It is in this context that global competitors attempt to use the resources at their disposal to develop sustainable competitive advantage and in which financial analysts predict the results of managerial decisions on the performance of the firm. industry competitive factors and business strategies will affect how financial analysts interpret the future performance of global competitors. 1982). or agreement between. financial reporting results from practical solutions developed at the firm (micro) level and institutionalized through disclosure practices at the industry and national (macro) levels (Leblebici & Salancik. financial analysts' estimates of future firm performance in a single predictive model. Zarzeski (1996) found that national cultural impacts the level of financial reporting in firms across seven developed countries. 1998). -----------------------------------Place Figure 1 about here -----------------------------------Figure 1 depicts the proposed relationships between national level (culture). industry level (competitive environment) and firm level (strategies) factors potentially affecting analysts' forecast behavior (accuracy and dispersion). political. company strategy and the accuracy or. Thus. Dass. In summary. 1998. et al. and economic differences across countries (Dass & Saudagaran. based . The current study examines whether national culture affects analysts= earnings forecasts by assuming cultural differences are related to financial reporting differences as well as business.. and related company information. will be positively associated with the number of financial analysts tracking and estimating the future performance of a company. She implied there is reason to believe that a greater level of financial reporting.Prior research indicates that firms develop practices to solve problems that arise as they attempt to realize value from business transactions (Rockart.
complexity and dynamism. respectively. we test the effects of national culture on firm performance prediction. In the Earnings Forecast Error Model. we propose the following research hypotheses: H1: Holding differences in national culture and industry competitive environment constant. we developed two models replicating the information available to financial analysts for their prediction of future company performance. In the Earnings Forecast Dispersion Model. environment and strategy. while controlling for the effects of national culture and industry competitive environment. Financial data reflecting performance and use of resources (strategies) of international companies was collected from Compustat's Global Vantage data base over the 1988-1992 time period. firm strategies will significantly affect the accuracy of financial analysts' estimates of future firm earnings. The measures employed are summarized in Figure 2 comparing the concepts discussed in the literature review to the operational measures.on the previous discussion. while controlling for business strategy and industry competitive environment. the control factors consist of the three measures of the industry competitive environment--munificence. H2: Holding differences in industry competitive environment and firm strategies constant. Data on the task environment and national culture was obtained from Dess and Beard (1984) and Hofstede (1980). national culture will significantly affect the dispersion of financial analysts' estimates of future firm earnings. we test the effects of firm strategies on firm performance prediction. Thus. I/B/E/S International provided the earnings forecast data for 1993. For both models. Methodology To test the research hypotheses. we define measures of culture. We propose two regression models related to financial analysts= earnings forecast behavior: forecast error and forecast dispersion. The Earnings Forecast Error Model=s independent variables of primary interest are five measures of firm .
providing some degree of assurance regarding the accuracy of the rankings used in the present study.strategies (inventory turnover. Typically. Size and Variability. large companies provide more information to investors and are followed by more analysts because of the amount of information provided to make predictions (Shipper. capital intensity. -------------------------------------Place Figure 2 about here -------------------------------------Control Factors Task Environment. ambiguity avoidance and masculinity/femininity. The five-year earnings variation calculated by I/B/E/S is the measure used for firm earnings stability. and complexity factors developed by Dess and Beard (1984). The sample contains 421 firms representing 30 industries (five industries for each of the three high and low conditions). power distance. et al. To control for the effects of the task environment. dynamism. financial slack. the standardized factor scores in the Dess and Beard study were rank ordered. A validation of the Dess and Beard (1984) study was conducted by Rasheed and Prescott (1987). The Earnings Forecast Dispersion Model=s independent variables of primary interest are the four dimensions of national cultural--individuality/collectivism. is included to control for the variability of earnings of each firm as suggested by Das. 1998. Two additional variables are included in the model to control for company size: the natural log of total firm assets and the total number of estimates for each firm. Strategy Measures Five accounting-based measures of business strategies are used as predictors of performance . research intensity and sales growth). A third variable.. earnings stability. 1991). data was collected for all firms in each of the five highest and five lowest ranked industries on the munificence. To find the relative five highest and five lowest industries.
and financial slack. three business strategies used by McArthur and Nystrom (1991) for which international data was available were replicated: inventory turnover. 1993). capital intensity is the ratio of assets to sales.accuracy. Since we are interested in assessing the impact of resource use (strategies) on performance prediction. they tend to provide a good sample of the strategies employed by firms in order to compete within industries and are based on information available to financial analysts through financial statements (Hitt & Ireland. Specifically. research intensity is the ratio of sales to research and development expenses. culture on the national level and task environment on the industry level are assessed using measures independent of firm financial data collected through Compustat Global Vantage. Thus. While these measures do not generally constitute a complete set of organizational strategies. Cultural Measures In order to assess the impact of national culture on business strategies and earnings forecasts. inventory turnover is the ratio of sales to inventory. In order to eliminate effects related to firm size. financial ratios were used for all firm-level predictors. research intensity and sales growth were also employed to capture technology and market dominance as potentially related to earnings predictions (Hambrick. In addition. Dependent Variables . and sales growth is the annual change in gross sales. Shane. 1987). measures capturing national culture were obtained from Hofstede (1980). All ratios were averaged over the five-year period to eliminate any potential effects attributed to cyclical variations due to macro-economic factors such as exchange rates or national recessions. 1983. Scores for the four cultural dimensions for each country are on a continuous scale ranging from 6 to 112. financial slack is stockholders' equity as a percentage of total debt. capital intensity.
As expected.05). p<. financial slack and research intensity. Specifically.09. Earnings Forecast Dispersion = ln (Standard Deviation of EPS Forecast). national culture measured by individualism and business strategies measured by inventory turnover. Results Table 1 reports the means.10) with industries having a low level of dynamism. In regard to forecast dispersion. capital intensity.11. earnings stability and number of estimates were found to be negative indicating that more information about the company results in more accurate estimations of future performance.01) and lower levels of complexity (r = .05) with industries having a high level of dynamism and a negative association (r = -.15. standard deviations and bivariate correlations for the measures employed. 1996). the incidence of forecast error was positively associated (r = . On a bivariate basis. forecast error was found to be significantly correlated with the level of industry dynamism. p<. p<. Analysts' forecasts of earnings were found to be marginally less dispersed in industries with lower levels of dynamism .11. significant bivariate relationships are evident in industry competitive environments which have higher levels of munificence (r = -16.01). the relationships between forecast accuracy and firm size. p<.23) reflects the systematic underestimation of earnings by financial analysts and is consistent with results reported in prior research (see for example. Lang & Lundholm. The negative average forecast error (-2.We measured the dependent variables of the two forecast models as follows: Earnings Forecast Error = ln (Actual Mean EPS B Forecast Mean EPS)/Actual Mean EPS. This makes sense since it would be more difficult for financial analysts to accurately forecast earnings in a dynamically changing industry compared to an industry that is relatively stable. A logarithmic transformation of each measure was employed to ensure a normal distribution. higher levels of complexity (r = . p<.
controlling for industry and national cultural factors (Katz. The results generally support Hypothesis 1. The results strongly support Hypothesis 2. p=. financial slack (a measure of management's decision to use cash as a competitive weapon). Forecast dispersion was found to be significantly associated (p<.. et al. That is. .0001) of the variance in earnings forecast errors made by financial analysts. --------------------------------Place Table 1 about here --------------------------------Table 2 reports the results of the Earnings Forecast Error Model. That is. 1997). Prior research has indicated that business strategies are significant determinants of firm performance.02). results in lower forecast error. These results are consistent with Mitroff and Mohrman (1987) and Nakata and Sivakumar (1996). and research intensity (management's decision to use investment in research and development as a basis for firm growth). Overall.10). specifically individuality (b = -. controlling for industry competitive factors and business strategies. controlling for the effects of industry factors. the model explains 12 percent (p<. In addition. The results of the model also indicate that national culture. the level of forecast error is significantly related to management decisions to allocate resources that result in changes to the rate of inventory turnover (a measure of relative operational efficiency). the results of the Earnings Forecast Error Model make sense.09.15. the size of the company and the number of analysts following the company resulted in lower variance among the analysts' estimates of earnings as predicted.01) with all four measures of national cultural consistent with Franke. Hofstede & Bond (1991). -------------------------------------Place Table 2 about here -------------------------------------Table 3 reports the results of the Earnings Forecast Dispersion Model.(r = -. Overall. p<.
p=. et al.. -------------------------------------Place Table 3 about here -------------------------------------Discussion . Interestingly. In the Earnings Forecast Dispersion Model.0001) of the variation in financial analysts= earnings forecast dispersion.national culture has a significant impact on the level of agreement among financial analysts with regard to future earnings of the firm. Conversely. 1981.09.008). such as Japan. it is more difficult for analysts to agree on the future earnings of the firm (Gray. the only significant business strategy found to affect the level of forecast dispersion is inventory turnover (b=. p=. Neither the size of the firm nor the variability of earnings appears to significantly impact estimate dispersion.75. Peterson. Shaw & McSweeney. all of the measures of culture are negatively associated with forecast dispersion (lower dispersion) except uncertainty avoidance (b=. Overall. 1995). such as the United States.001). financial analysts are less able to gain consensus on earnings forecasts because workers are unwilling to disclose operational vagaries resulting from the firm's competitive environment or strategies employed by the firm. in cultures where workers actively avoid uncertainty. Perhaps this occurs because in countries having lower levels of uncertainty avoidance. the model explains 54 percent (p<.
by examining the effects of four dimensions of national culture. By hypothesizing that business strategies would influence earnings forecasts. Our study also provides strong evidence that national culture is a dominant influence on the level of agreement among financial analysts= with regard to future earnings forecasts. Thus. 1995) . we extended the existing research beyond the domestic/multinational dichotomy typically employed in recent research (Cheng. We believe that our results extend the work of Hunter and Coggin (1988) by examining the broad array of information used by financial analysts in a more fine-grained crosssectional model than previous studies. Prior research has documented the importance of psychological processes used by financial analysts in making market predictions. We believe these findings have significant implications for . and sought to assess the relative impact of specific cultural factors on the level of agreement among financial analysts. of international competitors. Chan & Liao. Hunter and Coggin (1988) showed that human judgement is more important in determining the accuracy of earnings forecasts than the efficient market hypothesis which assumes all available information is viewed uniformly by financial analysts. Previous exploratory research has shown that understanding the factors affecting consensus earnings estimates in world financial markets is important to assist firms in their diversification strategies (Erickson & Cunniff. or failure. 1997). Our study provides evidence that business strategies are a major influence on the accuracy of financial analysts= earnings forecasts of international competitors.We began this study by seeking to better understand the relationship between business strategies and analysts= earnings forecasts of global competitors while taking into account other relevant factors (culture and industry) that have been suggested to affect the structure-strategyperformance relationship. we sought to control for the effects of national culture and industry on the estimation of future performance by financial analysts--experts employed to predict future success. Specifically.
global managers should be aware that national culture dramatically influences how analysts predict earnings. Managers choosing these strategies should provide management earnings estimates and other data for use by financial analysts in order to lessen the financial market impact resulting from a more complex set of strategies. Culture is the overwhelming predictor of the variability of analysts= forecasts. firms in countries having higher levels of individuality result in systematically higher levels of forecast accuracy. In addition. For example. such as the United States. For example. It is clear that stable earnings help financial analysts to more accurately predict future earnings. investors/financial analysts and academic researchers. In regard to the dispersion of analysts= earnings forecasts. disclose more extensive information to financial analysts (Zarzeski. 1996). Because both culture and analysis of future earnings performance are complex. Across countries. Implications for Global Managers Our results provide evidence that global managers employing fast-paced strategies such as high levels of research and development investment and high levels of inventory turnover may be providing an environment of prediction uncertainty for financial analysts. The second relationship may occur because management of firms in countries having high levels of individuality. Based on suggestions by Hofstede (1983) it is possible the first relationship occurs because management does not willingly disclose firm strategies to outsiders. Gonsalves and Eiler (1996) suggest it is important for managers to understand the impact of complexity on the operations of the firm and report in ways that will help stockholders and investors understand complexity faced by the firm. there is evidence that firms in countries having higher levels of power distance systematically have lower analysts= forecast errors. there are many potential reasons for disagreement about a firm=s future earnings.global managers. some cultures more readily disclose financial information and .
different industry environments. it has been reported that more financial analysts following a firm's activities will result in reduced cost of capital (Botosan. If more recent models of culture having additional cultural dimensions can be employed. the business strategies and the national culture of a firm are important considerations. future research should examine the information strategy. and global investors who use earnings predictions. Since numerous studies have shown that the change in earnings from one period to another correlates positively with the change in stock price at earnings announcement.have a larger financial analyst community. the product diversification strategy and the . Implications for Academic Researchers There are a number of issues for future research. this study should increase the awareness that. environment. In such cases. further insight into the nation/structure/strategy/performance relationship will be gained. and different company cultures. Implications for Financial Analysts/Global Investors The results of our study suggest that financial analysts who estimate earnings. are impacted by "layers" of contingent factors affecting the accuracy and dispersion of earnings predictions in the global marketplace. in addition to industry environment. the analysts face the daunting task of predicting earnings for firms with different strategies. strategy and performance predictions. 1997). However. We have shown that company financial reporting and investment community environments can be analyzed in more detail to determine more specifically the factors affecting earnings predictions. even though there may be larger analyst communities. For example. global investors should now include a greater understanding of these factors affecting the accuracy of earnings predictions. Our findings provide a useful departure for future inquiry into the interaction of culture. For global investors using earnings predictions for capital market decisions.
The global marketplace appears to be encouraging researchers from several disciplines to collaborate on studies that explain these global business relationships.geographic diversification strategy of firms across different cultures. .
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----------> Profit stability Depth of knowledge Performance Estimation Accuracy Variability (level of agreement) Beliefs Adapted from: Katz. 1997 Number of estimates Agreement among estimates (dispersion) Past Financial Performance----------> Earnings stability Expected Future Performance Estimation error . 1997 Figure 2 Operationalized Factors Affecting the Financial Performance Forecasting National Culture------------> Individuality Masculinity Power Distance Uncertainty Avoidance Task Environment----------> Munificence Complexity Dynamism Firm Strategies------------> Inventory turnover Capital intensity Financial slack Research intensity Sales growth Adapted from: Katz.Figure 1 Conceptual Factors Affecting the Financial Performance Forecasting National Factors------> Economic systems Legal Systems Political systems Technology Cultural Factors-------> Values Norms Industry Factors-------> Growth rate Firm homogeneity Market instability Strategy Factors-------> Efficiency Effectiveness Past Perf... et al. et al.
02 -.11** -.66*** -.03 -.05.09 -.20 .00 .00 .00 -.07 -.00 .12** -.09* .10.02 -.11* -.14*** .06 .05 1.14*** -.00 -.02 1.11** .36 0.95 .01 1.45*** -.00 .18*** .13 0.12 St D 1.07 two-tailed test p-values: * p < .03 2 1.47 .06 1.02 .13*** .58 2.13* -.06 -.33*** -.61*** .18*** -.07 -.34 34.20*** .37*** .97 32.76 1 1.02 -.05 -.29*** -.03 -.01 -.08 -.06 -.31 0.00 .02 -.04 -.12** .22*** -.46 1.50 12.09* -.22*** . ** p < .01 .05 . Standard Deviations and Correlations 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Forecast Error Forecast Dispersion Munificence High Munificence Low Dynamism High Dynamism Low Complexity High Complexity Low Uncertainty Avoidance Power Distance Masculinity Individualism Company Size Earnings Stability Number of Estimates Inventory Turnover Capital Intensity Financial Slack Research Intensity Sales Growth Mean -2.01 .00 .01 -.02 -.06 .10** -.09 58.11** -.52*** -.04 -.Table 1 Means.42 7.05 -.13** .00 .01 .10 0.00 -.19*** -.08 -.39 .18*** -.13*** -.02 .08 .19** .01 .20*** -.17*** -.05 -.18*** .00 -.04 .03 -.23 -1.16*** -.17*** .46 0.05 -.15 0.17*** .05 .46 22.05 .09* -.23 0.27 20.25 44.17 26. *** p < .00 .00 .10 -.12** .15*** .22 0.09* .01 .05 .17** .27*** -.06 .82 9.65*** -.00 -.23*** -.92 .16*** -.07 .00 -.28*** -.35*** -.10* -.06 -.29 23.15*** 1.03 -.35 7.03 .00 -.06 .34 0.48*** -.38 71.12** -.10 -.09* -.07 .09 .13** -.10* 1.26*** -.17*** -.46 .06 .08 .16*** -.01 -.21*** -.14*** .18 11.09* .03 .08 .03 -.17*** .04 1.09* 3 4 5 6 7 8 9 10 1.06 -.57 0.95 7.06 .16*** .13*** -.07 15.16*** .35*** -.20*** -.09* .17*** .41 0.54 65.10** -.27*** -.00 -.15*** -.02 -.07 .23*** -.31 0.15*** -.
02 1.09 .56 65.95 .20 .90 7.07 .00 -.00 .65 44.06 .05 -.31*** -.05 -.00 .36 0. *** p < .02 -.29 23.18*** .10 0.01 .47 .01 1.23 0.23 -1.10** .03 -.82*** 1.07 15.46 22.05.08 .01 -.42*** -.46 .08 -.13*** -.08 .00 .03 -.05 -.92 .01 .13* .57 0.13** 1.46 0.02 -.08 -.93 11.01 .31 0.00 -.13 0.34 34.58 2.07 70.46 1.95 0.41 0.02 -.15 0.08 -.09 .12** .00 -.09 57.82 9.11** -.35 7.12** -.34 0.00 -.12 St D 1.03 -.50 12.76 11 12 13 14 15 16 17 18 19 20 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Forecast Error Forecast Dispersion Munificence High Munificence Low Dynamism High Dynamism Low Complexity High Complexity Low Uncertainty Avoidance Power Distance Masculinity Individualism Company Size Earnings Stability Number of Estimates Inventory Turnover Capital Intensity Financial Slack Research Intensity Sales Growth 1.10.27 20.04 -.12* .31 0.00 -.01 1.00 -.00 1.00 .17 26.97 7.22 0.07 1.Table 1 Continued Mean -2.39 .00 two-tailed test p-values: * p < .07 1.59*** .01 1.09 -. ** p < .17*** .
45 .03 .022 -.003 .377 .03 -.Table 2 Earnings Forecast Error Model: Regression of Strategy.151 P-Value .004 .003 .830 .141 .004 .677 Beta -.023 .091 .132 .014 . and National Culture on Forecast Error Variables Inventory Turnover Capital Intensity Financial Slack Research Intensity Sales Growth Earnings Stability Number of Estimates Uncertainty Power Distance Masculinity Individuality Constant Adjusted R2 F P-Value .009 .01 -.01 -.751 .005 .917 .005 .119 .0001 B SE Beta .076 -.55 .05 2.008 .003 .03 .149 -.009 .007 -.001 -.04 -.008 .30 -1.002 .12 4.055 -.018 -.392 .01 .137 .158 -.194 . Environment.004 .
005 .003 .65 .008 .001 .882 .05 -.011 .001 .807 Beta .30 .014 -.251 .001 .0001 SE Beta .03 .001 -.001 .445 .754 -.682 .040 -.009 .06 -.14 -.053 -.005 .Table 3 Earnings Forecast Dispersion Model: Regression of Strategy.988 .08 -.005 .04 2.135 . and National Culture on Forecast Dispersion Variables Inventory Turnover Capital Intensity Financial Slack Research Intensity Sales Growth Earnings Stability Number of Estimates Uncertainty Power Distance Masculinity Individuality Constant Adjusted R2 F P-Value B .54 32.090 .251 .001 . Environment.280 -.67 1.398 P-Value .376 -.004 .054 .27 -.232 .036 .003 .449 .002 .005 .
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