Revenue-cost Matching, Auditing Quality And Analysts Forecast

This paper investigates on the relationship between revenue-cost matching and analyst behavior (i.e. analyst forecast accuracy and dispersion), as well as the impact of auditing quality on the relationship. The sample is made up of all listed companies A-share on Shanghai and Shenzhen during period2004to2011. The result shows that the better matching is associated with a more accurate analysts forecast, as matching is measured by discretionary production cost, abnormal operating cost ratio and abnormal ratio of selling cost to total cost. The results also shows when abnormal operating cost ratio is higher, the analysts forecast dispersion is also higher.As the information about cost or expenditure is the firm’s inside data and property, auditor may have more access to it, compared with outside analysts. When making earnings forecasts, analysts appear to rely on the judgment of auditors. This paper divides the sample based on big4auditing and non-big4auditing, and finds a significant difference between the two. In the subsample of non-big4, higher discretionary production cost, abnormal operating cost ratio and abnormal ratio of selling cost to total cost are associated with less analysts forecast accuracy, and higher abnormal operating cost ratio is associated with more analysts forecast dispersion. While for big4, such relationship no longer exists. Even if the firm’s revenue-cost matching deviates from the convention or average of the industry, analysts may attribute the deviation to the special circumstance of the firm, as long as the matching is verified by auditor.