Table 4. The relationship between audit...

Table 4.

The relationship between audit quality and management forecast revision speed, frequency and timeliness

	Predicted Sign	SPEED		REVFRQ		TIMELY
	Predicted Sign	Coefficient	t-statistic	Coefficient	t-statistic	Coefficient	t-statistic
Panel A: Full revision sample
Intercept	?	−0.1333	−3.22***	0.7875	6.43***	2.8878	14.88***
BIGN	+	0.0545	3.71***	−0.1922	−3.04***	0.8010	5.36***
MFACC	+	0.2196	23.60***	0.8432	24.79***	0.5280	8.57***
ABSDA	?	0.0727	4.30***	0.6309	9.48***	0.0747	0.45
SIZE	+	0.0085	7.96***	0.0280	5.70***	0.0495	4.29***
ROA	+	0.0523	1.66*	−1.4744	−10.96***	3.3974	10.70***
LOSS	–	0.0275	11.63***	0.1879	24.30***	0.1368	7.06***
LOSS_t×ROA	?	0.1495	3.35***	2.7994	15.32***	−4.7226	−11.74***
DISTRESS	–	−0.0031	−4.21***	−0.0116	−3.27***	−0.0332	−3.94***
NUMSUB	–	−0.0059	−6.35***	0.0052	1.18	−0.0281	−2.64***
EARNVOL	–	−0.0119	−4.71***	0.0012	0.11	−0.0533	−2.13**
BODSIZE	?	−0.0036	−1.69*	−0.0303	−3.06***	0.0205	0.84
OUTDIR	+	0.0119	2.26**	0.0856	3.52***	0.0268	0.42
OWNOFF	?	−0.0006	−0.08	−0.0761	−1.99**	−0.0540	−0.52
OWNCORP	?	−0.0028	−0.57	−0.0751	−3.18***	0.2236	3.70***
OWNBNK	?	0.0159	1.79*	0.0370	0.91	0.4415	4.48***
OWNFRGN	?	−0.0057	−0.57	−0.0081	−0.18	0.2858	2.50**
INVMILLS		−0.0313	−3.57***	0.1147	3.04***	−0.4775	−5.52***

Adjusted R² (%)		5.3		20.1		10.1
N		34,974		34,974		28,347
Panel B: Downward revision subsample (initial forecast error > 0)
Intercept	?	−0.1108	−2.21**	0.4417	3.47***	3.2952	17.12***
BIGN	+	0.1782	9.64***	0.3287	4.42***	0.7704	4.59***
MFACC	+	0.1431	15.20***	0.4684	14.81***	0.3242	4.87***
ABSDA	?	0.0381	1.67*	0.503	6.10***	−0.1857	−0.89
SIZE	+	−0.0013	−0.95	−0.0046	−0.80	0.0176	1.37
ROA	+	−0.5257	−10.61***	−3.6769	−17.47***	2.8816	6.15***
LOSS	–	0.0224	8.54***	0.1816	21.43***	0.1001	4.70***
LOSS_t×ROA	?	0.6042	10.51***	4.3525	18.33***	−4.2948	−8.12***
DISTRESS	–	−0.0058	−6.36***	−0.0174	−4.41***	−0.0306	−3.33***
NUMSUB	–	−0.0052	−4.38***	0.0107	2.07**	−0.0258	−2.16**
EARNVOL	–	−0.0072	−2.34**	0.0125	0.99	−0.0312	−1.16
BODSIZE	?	−0.0037	−1.31	−0.0263	−2.29**	0.0200	0.73
OUTDIR	+	0.0082	1.22	0.0854	3.09***	0.0570	0.80
OWNOFF	?	0.0084	0.84	−0.0229	−0.53	−0.0658	−0.60
OWNCORP	?	−0.0023	−0.36	−0.0588	−2.17**	0.1636	2.39**
OWNBNK	?	0.0233	2.06**	0.0994	2.12**	0.5099	4.84***
OWNFRGN	?	0.0247	1.90*	0.1175	2.24**	0.3508	2.78***
INVMILLS		−0.1039	−9.41***	−0.1954	−4.41***	−0.4601	−4.69***

Adjusted R² (%)		5.9		25.7		7.7
N		18,243		18,243		15,262
Panel C: Upward revision subsample (initial forecast error < 0)
Intercept	?	−0.2077	−14.76***	0.0440	0.78	2.7320	14.12***
BIGN	+	−0.0262	−1.15	−0.4787	−5.25***	0.7630	3.27***
MFACC	+	0.3889	17.13***	1.7181	18.92***	1.0113	7.39***
ABSDA	?	0.0878	3.52***	0.6697	6.88***	0.3537	1.37
SIZE	+	0.0175	11.21***	0.0543	8.41***	0.0916	5.47***
ROA	+	0.3264	7.49***	−0.6364	−3.48***	3.9398	8.96***
LOSS	–	0.0182	2.68***	0.1491	6.64***	0.0936	1.61
LOSS_t×ROA	?	−0.1263	−1.28	1.9542	5.07***	−5.9417	−7.79***
DISTRESS	–	0.0000	0.00	−0.0054	−1.15	−0.0343	−2.82***
NUMSUB	–	−0.0078	−5.96***	−0.0042	−0.79	−0.0339	−2.32**
EARNVOL	–	−0.0220	−5.37***	−0.0299	−1.84*	−0.1133	−2.61***
BODSIZE	?	−0.0037	−1.25	−0.0338	−2.65***	0.0184	0.53
OUTDIR	+	0.0145	1.86*	0.0694	2.09**	−0.0009	−0.01
OWNOFF	?	−0.0122	−1.02	−0.1340	−2.51**	−0.0818	−0.50
OWNCORP	?	−0.0017	−0.25	−0.0860	−2.77***	0.2878	3.38***
OWNBNK	?	0.0134	1.12	−0.0078	−0.15	0.3880	2.78***
OWNFRGN	?	−0.0285	−2.01**	−0.0749	−1.25	0.1661	1.01
INVMILLS		0.0153	1.13	0.2838	5.20***	−0.4542	−3.36***

Adjusted R² (%)		9.7		17.2		13.7
N		16,715		16,715		13,072

	Predicted Sign	SPEED		REVFRQ		TIMELY
	Predicted Sign	Coefficient	t-statistic	Coefficient	t-statistic	Coefficient	t-statistic
Panel A: Full revision sample
Intercept	?	−0.1333	−3.22***	0.7875	6.43***	2.8878	14.88***
BIGN	+	0.0545	3.71***	−0.1922	−3.04***	0.8010	5.36***
MFACC	+	0.2196	23.60***	0.8432	24.79***	0.5280	8.57***
ABSDA	?	0.0727	4.30***	0.6309	9.48***	0.0747	0.45
SIZE	+	0.0085	7.96***	0.0280	5.70***	0.0495	4.29***
ROA	+	0.0523	1.66*	−1.4744	−10.96***	3.3974	10.70***
LOSS	–	0.0275	11.63***	0.1879	24.30***	0.1368	7.06***
LOSS_t×ROA	?	0.1495	3.35***	2.7994	15.32***	−4.7226	−11.74***
DISTRESS	–	−0.0031	−4.21***	−0.0116	−3.27***	−0.0332	−3.94***
NUMSUB	–	−0.0059	−6.35***	0.0052	1.18	−0.0281	−2.64***
EARNVOL	–	−0.0119	−4.71***	0.0012	0.11	−0.0533	−2.13**
BODSIZE	?	−0.0036	−1.69*	−0.0303	−3.06***	0.0205	0.84
OUTDIR	+	0.0119	2.26**	0.0856	3.52***	0.0268	0.42
OWNOFF	?	−0.0006	−0.08	−0.0761	−1.99**	−0.0540	−0.52
OWNCORP	?	−0.0028	−0.57	−0.0751	−3.18***	0.2236	3.70***
OWNBNK	?	0.0159	1.79*	0.0370	0.91	0.4415	4.48***
OWNFRGN	?	−0.0057	−0.57	−0.0081	−0.18	0.2858	2.50**
INVMILLS		−0.0313	−3.57***	0.1147	3.04***	−0.4775	−5.52***

Adjusted R² (%)		5.3		20.1		10.1
N		34,974		34,974		28,347
Panel B: Downward revision subsample (initial forecast error > 0)
Intercept	?	−0.1108	−2.21**	0.4417	3.47***	3.2952	17.12***
BIGN	+	0.1782	9.64***	0.3287	4.42***	0.7704	4.59***
MFACC	+	0.1431	15.20***	0.4684	14.81***	0.3242	4.87***
ABSDA	?	0.0381	1.67*	0.503	6.10***	−0.1857	−0.89
SIZE	+	−0.0013	−0.95	−0.0046	−0.80	0.0176	1.37
ROA	+	−0.5257	−10.61***	−3.6769	−17.47***	2.8816	6.15***
LOSS	–	0.0224	8.54***	0.1816	21.43***	0.1001	4.70***
LOSS_t×ROA	?	0.6042	10.51***	4.3525	18.33***	−4.2948	−8.12***
DISTRESS	–	−0.0058	−6.36***	−0.0174	−4.41***	−0.0306	−3.33***
NUMSUB	–	−0.0052	−4.38***	0.0107	2.07**	−0.0258	−2.16**
EARNVOL	–	−0.0072	−2.34**	0.0125	0.99	−0.0312	−1.16
BODSIZE	?	−0.0037	−1.31	−0.0263	−2.29**	0.0200	0.73
OUTDIR	+	0.0082	1.22	0.0854	3.09***	0.0570	0.80
OWNOFF	?	0.0084	0.84	−0.0229	−0.53	−0.0658	−0.60
OWNCORP	?	−0.0023	−0.36	−0.0588	−2.17**	0.1636	2.39**
OWNBNK	?	0.0233	2.06**	0.0994	2.12**	0.5099	4.84***
OWNFRGN	?	0.0247	1.90*	0.1175	2.24**	0.3508	2.78***
INVMILLS		−0.1039	−9.41***	−0.1954	−4.41***	−0.4601	−4.69***

Adjusted R² (%)		5.9		25.7		7.7
N		18,243		18,243		15,262
Panel C: Upward revision subsample (initial forecast error < 0)
Intercept	?	−0.2077	−14.76***	0.0440	0.78	2.7320	14.12***
BIGN	+	−0.0262	−1.15	−0.4787	−5.25***	0.7630	3.27***
MFACC	+	0.3889	17.13***	1.7181	18.92***	1.0113	7.39***
ABSDA	?	0.0878	3.52***	0.6697	6.88***	0.3537	1.37
SIZE	+	0.0175	11.21***	0.0543	8.41***	0.0916	5.47***
ROA	+	0.3264	7.49***	−0.6364	−3.48***	3.9398	8.96***
LOSS	–	0.0182	2.68***	0.1491	6.64***	0.0936	1.61
LOSS_t×ROA	?	−0.1263	−1.28	1.9542	5.07***	−5.9417	−7.79***
DISTRESS	–	0.0000	0.00	−0.0054	−1.15	−0.0343	−2.82***
NUMSUB	–	−0.0078	−5.96***	−0.0042	−0.79	−0.0339	−2.32**
EARNVOL	–	−0.0220	−5.37***	−0.0299	−1.84*	−0.1133	−2.61***
BODSIZE	?	−0.0037	−1.25	−0.0338	−2.65***	0.0184	0.53
OUTDIR	+	0.0145	1.86*	0.0694	2.09**	−0.0009	−0.01
OWNOFF	?	−0.0122	−1.02	−0.1340	−2.51**	−0.0818	−0.50
OWNCORP	?	−0.0017	−0.25	−0.0860	−2.77***	0.2878	3.38***
OWNBNK	?	0.0134	1.12	−0.0078	−0.15	0.3880	2.78***
OWNFRGN	?	−0.0285	−2.01**	−0.0749	−1.25	0.1661	1.01
INVMILLS		0.0153	1.13	0.2838	5.20***	−0.4542	−3.36***

Adjusted R² (%)		9.7		17.2		13.7
N		16,715		16,715		13,072

Notes:

Panels A, B, and C of the table report estimates from the following equation using the entire forecast revision sample, downward revision sample, and upward revision sample, respectively:

REVISIO N_{i, t} = β_{0} + β_{1} BIG N_{i, t} + β_{2} MFAC C_{i, t} + β_{3} ABSD A_{i, t} + β_{4} SIZ E_{i, t} + β_{5} RO A_{i, t} + β_{6} LOS S_{i, t} + β_{7} RO A_{i, t} \times LOS S_{i, t} + β_{8} DISTRES S_{i, t} + β_{9} NUMSU B_{i, t} + β_{10} EARNVO L_{i, t} + β_{11} BODSIZ E_{i, t} + β_{12} OUTDI R_{i, t} + β_{13} OWNOF F_{i, t} + β_{14} OWNCOR P_{i, t} + β_{15} OWNBN K_{i, t} + β_{16} OWNFRG N_{i, t} + β_{17} INVMILL S_{i, t} + γ Year Dummies + δ Industry Dummies + ε_{i, t}

(2)

where REVISION indicates SPEED, REVFRQ or TIMELY. SPEED measures forecast revision speed and is calculated by subtracting the industry-year average revision speed from speed (estimated by the natural logarithm of the ratio of the base case scenario of forecast revision pattern to firms’ forecast revision pattern during the fiscal year plus one). REVFRQ denotes forecast revision frequency and is the natural logarithm of the number of forecast revisions plus one. TIMELY denotes forecast revision timeliness and is the natural logarithm of the sum of the number of trading days between forecast revision and the earnings announcement dates divided by the number of forecast revisions. BIGN captures audit quality and equals 1 if a firm is audited by a Big N auditor and 0 otherwise. MFACC indicates forecast accuracy and is defined as the absolute value of the initial management earnings forecast minus realized earnings deflated by lagged market value of equity. ABSDA captures the absolute magnitude of earnings management through abnormal accruals and is estimated using the cross-sectional Jones (1991) model. SIZE denotes firm size and is the natural logarithm of lagged market value of equity. ROA is the ratio of net income to total assets. LOSS is 1 if the firm’s net income is negative and 0 otherwise. DISTRESS denotes financial distress estimated by Zmijewski’s (1984) financial distress index. NUMSUB is the natural logarithm of the number of subsidiaries plus one. EARNVOL denotes earnings volatility and is defined as the standard deviations of return-to-equity over the previous five years. BODSIZE is the natural logarithm of the total number of directors on the board. OUTDIR is the ratio of outside directors to total number of directors. OWNOFF, OWNCORP, OWNBNK and OWNFRGN are the percentage ownership interest of management and board members, other companies (excluding financial institutions), financial institution and foreign investors, respectively. Year and industry fixed effects are included. *, ** and *** denote significance at the 10, 5 and 1% levels, respectively (two-tailed). Outliers at or beyond the 1st and 99th percentiles of the distributions of all continuous variables have been winsorized. All the t-statistics are based on cluster-robust standard errors by firm.

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