With the collapse of the TMT bubble and a number of high-profile scandals of corporate governance around the world, the language of finance is being re-written to include market inefficiency. Not surprisingly, there is an increasing premium on market information - national and international. As a consequence, the argument in favour of global standards has gained force, encouraged by new institutions such as the IASB. Co-existence of reporting standards seems a most unlikely prospect just as harmonisation may be less important than convergence to a set of standards deemed to be best practice in terms of global financial performance. With the increasing global significance of institutional investors and their portfolio managers, common standards set within well-defined parameters are clearly on the agenda; convergence is the name of the game rather than a tapestry of multi-coloured threads stitched together for the sake of expediency. In this paper, we develop these observations paying particular regard to the interests of institutional investors as well as the burgeoning market for global metrics not just national reporting standards.

/pdf/institutional-investors-and-the-language-of-finance-the-4vh0yqi4i9.pdf

Institutional investors and the language of finance: the global metrics of market performance

Increasing longevity will impact retirement savings adversely. For defined benefit social insurance and private pension plans, its primary impact will be to increase costs. For accumulation-type savings arrangements, either group or individual, increasing longevity will lead to less adequate benefits than anticipated. A critical component with respect to funded or partially funded retirement savings programs will be the rate of investment earnings achieved. Most private retirement plans and certain partially funded social insurance plans, such as the Canada Pension Plan, invest in equities. Accordingly, the return achieved on equity markets will be an important determinate of the level of benefits delivered and the costs associated with the retirement savings system. With increasing longevity of the population, the resultant savings gain or loss to the retirement system of the equity risk premium being greater or less than its forecast level will be magnified. This paper reviews current research with respect to the equity risk premium. It uses an estimate of the equity risk premium derived from such research, combined with data regarding projected increases in mortality, and applies this information to the Canadian retirement income system. Based on the estimates of the equity risk premium and the current actuarial assumptions used to model the Canada Pension Plan, it shows the projected impact on that plan. It presents a similar analysis for other Canadian retirement savings. The paper concludes that if the lower estimates of the equity risk premium materialize, when combined with the increasing longevity of the Canadian population, the retirement savings system faces significant challenges.

The Impact of the Equity Risk Premium and Population Aging on The Canadian Retirement Savings System

In this study we examine the accuracy of analyst long-term and one-year earnings per share growth rate forecasts over the last 20 years. We find that analysts' earnings growth rate estimates are consistently overly-optimistic and are about two times the level of GDP growth. Analyst predictions of earnings are better for one-year projections than for long-term projections, but are still overly-optimistic. We find that analyst coverage does not have a significant impact on the optimistic bias in analysts EPS growth rate forecasts. We do find that a contributing factor for the bias in analysts' earnings estimates is the resistance of analysts to project negative earnings growth. Furthermore, we find that earnings estimates have a continued bias after the 2003 Global Analyst Research Settlements.

The Accuracy of Analysts' Long-Term Earnings Per Share Growth Rate Forecasts

The following study analyzes the accuracy and bias of sell-side equity analyst’s longterm earnings per share growth forecasts. Having a firm understanding of the accuracy of analyst’s long-term earnings per share estimates is vital for any professionals using such forecasts when performing financial valuation, estimating cost of capital, and making investment decisions. By comparing long-term earnings per share growth rate estimates to actual earnings per share growth rates observed, both the accuracy and bias of forecasts were evaluated. Specifically, this study was focused on discovering whether analysts’ estimates have improved over time. Even with the implementation of recent regulatory reforms aimed to improve the bias and inaccuracy of analyst forecasts, this study found no significant evidence that such changes have been helpful in improving the accuracy or continued upward bias that exists in long-term earnings per share growth rate estimates. Recognition of this persistent bias and inaccuracy of long-term earnings per share growth rate estimates is vital for all market participants to understand and take into consideration in order to make prudent investment decisions.

/pdf/examining-the-impacts-of-regulation-on-long-term-earnings-2s61kp0ugk.pdf

Examining the Impacts of Regulation on Long-term Earnings Growth Forecasts

Part of the mission of the Financial Analysts Journal is to stimulate creative thinking about financial analysis, including investment valuation, risk management, fiduciary issues, and asset allocation. As part of that mission, the editor raises questions about and calls for investigation of the following practices: Why does our industry forecast aggregate corporate earnings growth rates that are faster than sustainable GDP growth? Why do we not question pension return assumptions? Why accept rising pension return expectations in a rising market? Why allow actuarial or accounting assumptions to drive investment practice? Why readily accept return forecasts based on extrapolating the past? Why not “normalize” return assumptions? Why is the topic of expensing management stock options controversial? When various “earnings” figures diverge, why not ask why? Why is a negative equity risk premium considered shocking? Why is our industry often surprised and distrustful when empirical tests fail to support accept...

D ArnottRobert

Papers

Is Our Industry Intellectually Lazy