Implications of Cost Behavior for Analysts’ Earnings Forecasts

59 Pages Posted: 18 Sep 2013 Last revised: 10 Feb 2015

See all articles by Mustafa Ciftci

Mustafa Ciftci

American University of Sharjah - School of Business and Management

Raj Mashruwala

University of Calgary - Haskayne School of Business

Dan Weiss

Tel Aviv University - Coller School of Management

Date Written: September 17, 2013

Abstract

Recent work in management accounting offers several novel insights into firms’ cost behavior. This study explores whether financial analysts appropriately incorporate information on two types of cost behavior in predicting earnings - cost variability and cost stickiness. Since analysts’ utilization of information is not directly observable, we model the process of earnings prediction to generate empirically testable hypotheses. The results indicate that analysts “converge to the average” in recognizing both cost variability and cost stickiness, resulting in substantial and systematic earnings forecast errors. Particularly, we find a clear pattern - inappropriate incorporation of available information on cost behavior in earnings forecasts leads to larger errors in unfavorable scenarios than in favorable ones. Overall, enhancing analysts’ awareness of the expense side is likely to improve their earnings forecasts, mainly when sales turn to the worse.

Keywords: cost stickiness, cost variability, analysts’ earnings forecasts, expense forecasts

JEL Classification: M41, M46, G12

Suggested Citation

Ciftci, Mustafa and Mashruwala, Raj and Weiss, Dan, Implications of Cost Behavior for Analysts’ Earnings Forecasts (September 17, 2013). Journal of Management Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2327167 or http://dx.doi.org/10.2139/ssrn.2327167

Mustafa Ciftci (Contact Author)

American University of Sharjah - School of Business and Management ( email )

P.O. Box 26666
Sharjah
United Arab Emirates

Raj Mashruwala

University of Calgary - Haskayne School of Business ( email )

2500 University Drive NW
Calgary, Alberta T2N 1N4
Canada
403-220-4332 (Phone)

Dan Weiss

Tel Aviv University - Coller School of Management ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel

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