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Does Auditor Industry Specialization Increase Analysts’ Forecast Accuracy? Evidence from the Listed Firms of Australia

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  • Aditi Shams

Abstract

This paper examines the relation between auditor industry specialization and analysts’ beginning-of-the-year earnings forecast accuracy. It predicts that the higher industry specialization of the auditors will improve the quality of external financial reports and thus mitigates the analysts’ forecast error. It also predicts that higher audit quality will have a negative association with analyst forecast dispersion. The empirical test results on Australian listed firms from the year 2003 to 2012 does not find evidence of association between audit firm industry specialization and analysts’ beginning-of the year earnings forecast error. However, firms with higher analysts forecast error is associated with lower forecast dispersion among analysts, which is consistent with the prediction that analysts are consistent with predicting future earnings and analysts possess similar traits in terms of difference with the actual earnings. Additional analysis also finds that’s larger firms have less forecast errors compared to smaller firms. The findings contribute to the growing literature on auditing and financial reporting quality in Australian context.

Suggested Citation

  • Aditi Shams, 2020. "Does Auditor Industry Specialization Increase Analysts’ Forecast Accuracy? Evidence from the Listed Firms of Australia," Asian Social Science, Canadian Center of Science and Education, vol. 16(3), pages 1-46, March.
    • Handle: RePEc:ibn:assjnl:v:16:y:2020:i:3:p:46
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    References listed on IDEAS

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    1. DeAngelo, Linda Elizabeth, 1981. "Auditor size and audit quality," Journal of Accounting and Economics, Elsevier, vol. 3(3), pages 183-199, December.
    2. Julie Cotter & Ann Tarca & Marvin Wee, 2012. "IFRS adoption and analysts’ earnings forecasts: Australian evidence," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 52(2), pages 395-419, June.
    3. Vincent E. Owhoso & William F. Messier, Jr. & John G. Lynch, Jr., 2002. "Error Detection by Industry‐Specialized Teams during Sequential Audit Review," Journal of Accounting Research, Wiley Blackwell, vol. 40(3), pages 883-900, June.
    4. Abarbanell, Jeffery & Lehavy, Reuven, 2003. "Biased forecasts or biased earnings? The role of reported earnings in explaining apparent bias and over/underreaction in analysts' earnings forecasts," Journal of Accounting and Economics, Elsevier, vol. 36(1-3), pages 105-146, December.
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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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