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Xiaomeng Chen

First Name: Xiaomeng (Charlene)
Surname: Chen
Department Dept of Accounting and Corporate Governance
Supervisor(s): Associate Professor Sue Wright , Dr Hai Wu (ANU)

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Paper Title

The Effect of Exploration Intensity on Analystsí Forecasts

Purpose

This study examines the relations between the intensity of reported exploration activity by mining and exploration companies and analystsí private information search activities and their forecast accuracy. Under Australian accounting standards, firms can either record exploration expenditure as an expense as it is incurred, or as an exploration asset (i.e., exploration expenditure is capitalised). The accounting choice for exploration expenditure could have potential impact on analystsí forecasts. It also examines the relations under the different accounting treatment for exploration expenditure.

Originality

This study examines whether greater intensity of exploration activity motivates analysts to acquire and process relatively more private information to meet investor demand and whether this affects the accuracy of analystsí consensus forecast. It also examines whether the capitalisation of exploration expenditure can reduce uncertainty analysts have about the future economic outcomes of exploration investments, and improve the accuracy of their forecasts.

Findings

The study finds that the proportion of private information contained in analystsí forecasts increases with the intensity of exploration activity. We also find that the accuracy of analystsí consensus forecast improves with the intensity of exploration activity. The results are robust for firms choosing to capitalise their exploration expenditure.

Research limitations/implications

Using the extractive industry as a specific setting, this study evaluates the role of analysts in moderating high information asymmetry exhibited in this industry. The findings are useful to investors and academics because it addresses how accounting matters when investing.

Keywords

Exploration intensity, analystsí forecasts