The Effects of Offshore Activities on Financial Analyst Forecasts and Restatements

Date

2022

Authors

Sun, Xueyun

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Abstract

The dissertation consists of two essays on offshore activities. As economic globalization accelerates, there is a trend for multinational companies to conduct their operations in foreign countries. This study identifies offshore activities in more than 200 countries each year for publicly listed U.S. firms by textual analysis of SEC 10-K filings. Additionally, I classify offshore activities into two main categories: the sale of outputs in foreign nations (offshore output) and the procurement of inputs in foreign nations (offshore input).Essay 1 investigates whether and how offshore activities influence the properties of analysts' earnings forecasts. I argue that offshore activities increase firms' business risks and complexities, and the difficulties of forecasting tasks, which could lead to more forecast errors, larger forecast revisions, and less forecast precision (more rounding). Consistent with the hypotheses, I find that offshore activities are positively associated with three aspects of analysts' earnings forecasts: forecast errors, forecast revision magnitude, and forecast rounding. Further, the results show that offshore input activities have more influence on analyst forecasting behaviors than output activities. In addition, I find that the positive association between offshore activities and analysts' earnings forecasts is more pronounced for firms with offshore operations in low rule of law countries and tax havens. This paper contributes to a better understanding of offshore activities and their impact on market participants' decision-making. Essay 2 examines whether and how offshore activities influence the occurrence and consequence of financial restatements. I argue that offshore activities can result in more accounting misstatements due to complex reporting requirements, unfamiliarity with foreign regulations, and less effective monitoring by investors. Consistent with the hypotheses, I find a positive association between offshore activities and the likelihood of restatement. In addition, I find that offshore firms experience larger stock price declines following a restatement and are more likely to replace CEOs to restore investors' trust. Overall, more negative market returns and greater CEO turnovers around restatements confirm the reputation penalties for offshoring. Furthermore, I find that the association between offshore activities and negative market reactions to restatements is more salient when offshoring is located in low rule of law countries. Interestingly, the relation between offshoring and CEO turnover is more pronounced when offshore activities are in high rule of law countries. This study contributes to a better understanding of offshore activities, and the findings of this study are of interest to regulators, researchers, auditors, and investors.

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Keywords

Analyst Forecasts, Earnings Forecasts, Offshore Activities, Restatements

Citation

Department

Accounting