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ISSN : 2233-4165(Print)
ISSN : 2233-5382(Online)
Journal of Industrial Distribution & Business Vol.11 No.1 pp.39-47
DOI : http://dx.doi.org/10.13106/ijidb.2020.vol11.no1.39

The Impact of Overvaluation on Analysts’ Forecasting Errors

Sang-Kwon CHA*,Hyunji CHOI**
*First Author and Corresponding Author: Ph.D. Candidate, The Department of Accounting, Hanyang University, Seoul, Korea, Email: sangkwon@hanyang.ac.kr

© Copyright: Korean Distribution Science Association (KODISA)
This is an Open Access article distributed under the terms of the Creative Commons Attribution Non- Commercial License (https://creativecommons.org/licenses/by-nc/4.0/) which permits unrestricted noncommercial use, distribution, and reproduction in any medium, provided the original work is properly cited.
**Co-Author: Ph.D. Student, The Department of Accounting, Hanyang University, Seoul, Korea, Email: choihj49@hanyang.ac.kr
November 29, 2019 December 20, 2019 January 05, 2020

Abstract

Purpose: This study investigated the effects of valuation errors on the capital market through the earnings forecasting errors of financial analysts. As a follow-up to Jensen (2005)'s study, which argued of agency cost of overvaluation, it was intended to analyze the effect of valuation errors on the earnings forecasting behavior of financial analysts. We hypothesized that if the manager tried to explain to the market that their firms are overvalued, the analysts’ earnings forecasting errors would decrease. Research design, data and methodology: To this end, the analysis period was set from 2011 to 2018 of KOSPI and KOSDAQ-listed markets. For overvaluation, the study methodology of Rhodes-Kropf, Robinson, and Viswanathan (2005) was measured. The earnings forecasting errors of the financial analyst was measured by the accuracy and bias. Results: Empirical analysis shows that the accuracy and bias of analysts' forecasting errors decrease as overvaluation increase. Second, the negative relationship showed no difference, depending on the size of the auditor. Third, the results have not changed sensitively according to the listed market. Conclusions: Our results indicated that the valuation error lowered the financial analyst earnings forecasting errors. Considering that the greater overvaluation, the higher the compensation and reputation of the manager, it can be interpreted that an active explanation of the market can promote the accuracy of the financial analyst's earnings forecasts. This study has the following contributions when compared to prior research. First, the impact of valuation errors on the capital market was analyzed for the domestic capital market. Second, while there has been no research between valuation error and earnings forecasting by financial analysts, the results of the study suggested that valuation errors reduce financial analyst's earnings forecasting errors. Third, valuation error induced lower the earnings forecasting error of the financial analyst. The greater the valuation error, the greater the management's effort to explain the market more actively. Considering that the greater the error in valuation, the higher the compensation and reputation of the manager, it can be interpreted that an active explanation of the market can promote the accuracy of the financial analyst's earnings forecasts.

JEL Classification Code : D40, G10, M41

초록


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