Analysts’ Incentives to Overweight Management Guidance when Revising Their Short-Term Earnings Forecasts

2009 ◽  
Author(s):  
Mei Feng ◽  
Sarah E. McVay
Keyword(s):  
Earnings Forecasts ◽  
Short Term ◽  
Management Guidance

Analysts’ Incentives to Overweight Management Guidance When Revising Their Short-Term Earnings Forecasts

2010 ◽  
Vol 85 (5) ◽  
pp. 1617-1646 ◽  
Author(s):  
Mei Feng ◽  
Sarah McVay
Keyword(s):  
Forecast Accuracy ◽  
Earnings Forecasts ◽  
Investment Banking ◽  
Equity Offerings ◽  
Short Term ◽  
Management Guidance ◽  
Banking Business

ABSTRACT: We document that, when revising their short-term earnings forecasts in response to management guidance, analysts wishing to curry favor with management weight the guidance more heavily than predicted, based on the credibility and usefulness of the guidance. This overweighting of guidance is present prior to equity offerings and other events that could lead to investment banking business. Although analysts sacrifice their forecast accuracy by overweighting management guidance, they appear to benefit, on average, by subsequently gaining the underwriting business for their banks. Thus, while analysts wishing to please managers are optimistic in their long-term earnings forecasts, they take their cue from management when determining their short-term earnings forecasts.

The Rewards for Meeting or Beating Managers' Own Earnings Guidance

2020 ◽  
Author(s):  
Kai Wai Hui ◽  
Alfred Z. Liu ◽  
Yao Zhang
Keyword(s):  
Stock Return ◽  
Earnings Forecasts ◽  
Earnings Guidance ◽  
Cross Sectional ◽  
Earnings Expectations ◽  
Future Performance ◽  
Management Guidance ◽  
Prior Literature ◽  
Management Earnings Guidance ◽  
Analyst Earnings

This study documents a stock return premium for meeting or beating management's own earnings guidance (MBMG) that is separate and distinct from the premium for meeting or beating analysts' earnings forecasts (MBAF) documented in prior literature. Cross-sectional analyses reveal that the MBMG premium relative to the MBAF premium increases when management guidance is more informative. We also find that MBMG is incrementally informative about a firm's future performance after considering MBAF. Our findings suggest that investors consider management earnings guidance to be a performance threshold in addition to analyst earnings forecasts when forming earnings expectations.

(Dis)aggregated earnings forecasts and acquisition financing

2019 ◽  
Vol 28 (2) ◽  
pp. 255-271
Author(s):  
Paul Ordyna
Keyword(s):  
Voluntary Disclosure ◽  
Logistic Model ◽  
Earnings Forecasts ◽  
Merger And Acquisition ◽  
Management Forecasts ◽  
Earnings Guidance ◽  
Content Type ◽  
True Value ◽  
Acquiring Firms ◽  
Management Guidance

Purpose The purpose of this paper is to examine how a firm’s mergers and acquisitions (M&A) goals influence its voluntary disclosure policy. Specifically, this paper examines how a firm’s M&A financing intentions influence the degree of aggregation in management guidance prior to and after the M&A transaction. Design/methodology/approach Using a logistic model, this study tests the relation between M&A financing and the decision to issue disaggregate earnings guidance for 3,929 acquiring firms from 2007 to 2011. Findings The logistic regression results show that firms are more likely to provide disaggregate earnings guidance when using mostly stock to finance M&A and that the incentives to disaggregate guidance vary throughout the M&A transactional window. Alternatively, because the value of cash is independent of the true value of the acquirer, the results show that firms offering mostly cash to finance M&A are less likely to issue disaggregate earnings forecasts. Additional analysis reveals that the decision to issue disaggregate earnings guidance also influences post-merger outcomes such as CEO turnover. Research limitations/implications The choice to disaggregate earnings guidance and the choice to use stock as a means to finance an acquisition is made by management, thus are endogenous which could introduce bias. Originality/value This study provides insights into management’s incentives and attitudes toward the use of management forecasts to effect a potential merger and acquisition. Given the flexibility management has in issuing voluntary forecasts, management can tailor a financial message toward investors and potential targets in attempt to facilitate a merger and acquisition and to further the firm’s goals.

Does the Form of Management's Earnings Guidance Affect Analysts' Earnings Forecasts? (Retracted)

2006 ◽  
Vol 81 (1) ◽  
pp. 207-225 ◽  
Author(s):  
Robert Libby ◽  
Hun-Tong Tan ◽  
James E. Hunton
Keyword(s):  
Narrow Range ◽  
Earnings Forecasts ◽  
Point Estimate ◽  
Earnings Guidance ◽  
Earnings Announcement ◽  
Wide Range ◽  
Information Precision ◽  
Management Guidance ◽  
Psychology Literature ◽  
Relationship Of

This study examines how the form of management's earnings guidance (point, narrow range, wide range) affects analysts' earnings forecasts. Results from two experiments demonstrate that: (1) guidance form has no effect on analysts' forecasts made immediately after the guidance; and (2) after the actual earnings announcement, guidance form and the relationship of the earnings guidance to actual earnings (guidance error) interact in their effect on analysts' forecasts. After the actual earnings announcement, guidance error leads to higher (lower) analysts' forecasts for firms with downwardly (upwardly) biased guidance; this effect of guidance error is magnified by a narrow range and reduced by a wide range, compared to a point estimate. These results suggest that treating the mean of the range endpoints as equivalent to a point estimate and failing to consider effects after the release of actual earnings may paint an incomplete picture of how management guidance affects analysts and investors. It also offers useful information to managers who issue earnings guidance, and presents a challenge to the psychology literature regarding the effects of information precision on judgment and decision making.

scholarly journals Updating great expectations: The effect of peer salary information on own-earnings forecasts

2020 ◽  
Author(s):  
Sam Jones ◽  
Ricardo Santos
Keyword(s):  
Job Search ◽  
Cognitive Skills ◽  
Public Information ◽  
Earnings Forecasts ◽  
Short Term ◽  
Great Expectations ◽  
Earnings Expectations ◽  
Salary Information ◽  
The Impact

How jobseekers set their earnings expectations is central to job search models. To study this process, we track the evolution of own-earnings forecasts over 18 months for a representative panel of university-leavers in Mozambique and estimate the impact of a wage information intervention. We sent participants differentiated messages about the average earnings of their peers, obtained from prior survey rounds. Demonstrating the stickiness of (initially optimistic) beliefs, we find an elasticity of own-wage expectations to this news of around 7 per cent in the short term and 16 per cent over the long term, which compares to a 22 per cent elasticity in response to unanticipated actual wage offers. We further find evidence of heterogeneous updating heuristics, where factors such as the initial level of optimism, cognitive skills, perceived reliability of the information, and valence of the news shape how wage expectations are updated. We recommend institutionalizing public information about earnings.

scholarly journals The effect of takeover defenses on long term and short term analysts’ earnings forecasts: The case of poison pills

2007 ◽  
Vol 4 (4) ◽  
pp. 140-144 ◽  
Author(s):  
Thomas A. Turk ◽  
Jeremy Goh ◽  
Candace E. Ybarra
Keyword(s):  
Earnings Forecasts ◽  
Security Analysts ◽  
Short Term ◽  
Takeover Defenses ◽  
Poison Pill ◽  
Poison Pills ◽  
One Year

This study examined the effect of poison pill adoption on long term and short earnings forecasts by security analysts. Our results provide no evidence of significant revisions in one-year or five-year earnings forecasts following the adoption of poison pills. We do find evidence, however, that firms adopt poison pills following a period of significant negative revisions in earnings forecasts. Our results suggest that poison pill adoptions may be a response to downward revisions in earnings forecasts

Characteristics and Implications of Long-Term Earnings Guidance

2020 ◽  
Vol 6 (1) ◽  
pp. 33-54
Author(s):  
Andrew C. Call ◽  
Adam M. Esplin ◽  
Bin Miao
Keyword(s):  
Voluntary Disclosure ◽  
Earnings Forecasts ◽  
Data Availability ◽  
Real Earnings Management ◽  
Limited Attention ◽  
Earnings Guidance ◽  
Short Term ◽  
Operating Environments ◽  
Growth Forecasts

ABSTRACT We examine a form of voluntary disclosure that has received limited attention to date, namely, managers' long-term guidance for earnings three to five years in advance. We identify 1,739 long-term earnings forecasts issued by 295 unique firms from 2000 to 2012 and find that relative to firms that issue only short-term earnings guidance, those that also issue long-term guidance are larger, have more certain operating environments, and are followed by analysts who are more likely to issue long-term growth forecasts. Long-term guidance is informative to investors and analysts incorporate the news contained in these forecasts into their own long-term growth forecasts. We also document that the issuance of long-term guidance is associated with more (less) investor focus on long-term (short-term) earnings news. Last, we find mixed evidence on the association between long-term guidance and real earnings management decisions. Our study adds to the literature on managers' voluntary disclosure choices. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G17; M41.

Do Investors Fully Unravel Persistent Pessimism in Analysts' Earnings Forecasts?

2017 ◽  
Vol 93 (3) ◽  
pp. 349-377 ◽  
Author(s):  
David Veenman ◽  
Patrick Verwijmeren
Keyword(s):  
Stock Returns ◽  
Earnings Forecasts ◽  
Analyst Forecast ◽  
Short Term ◽  
Market Prices ◽  
Earnings Expectations ◽  
Earnings Surprises ◽  
Announcement Returns ◽  
Low Probability ◽  
Jel Classifications

ABSTRACT This study presents evidence suggesting that investors do not fully unravel predictable pessimism in sell-side analysts' earnings forecasts. We show that measures of prior consensus and individual analyst forecast pessimism are predictive of both the sign of firms' earnings surprises and the stock returns around earnings announcements. That is, we find that firms with a relatively high probability of forecast pessimism experience significantly higher announcement returns than those with a low probability. Importantly, we show that these findings are driven by predictable pessimism in analysts' short-term forecasts, as opposed to optimism in their longer-term forecasts. We further find that this mispricing is related to the difficulty investors have in identifying differences in expected forecast pessimism. Overall, we conclude that market prices do not fully reflect the conditional probability that a firm meets or beats earnings expectations as a result of analysts' pessimistically biased short-term forecasts. JEL Classifications: G12; G14; G20.

Benefits of management disclosure precision on analysts’ forecasts

2014 ◽  
Vol 13 (4) ◽  
pp. 371-399 ◽  
Author(s):  
Yu-Ho Chi ◽  
David A. Ziebart
Keyword(s):  
Forecast Accuracy ◽  
Earnings Forecasts ◽  
Forecast Errors ◽  
Management Earnings Forecasts ◽  
Earnings Guidance ◽  
Short Term ◽  
Content Type ◽  
Management Forecast ◽  
Forecast Precision ◽  
The Impact

Purpose – The purpose of this paper is to examine the impact of management’s choice of forecast precision on the subsequent dispersion and accuracy of analysts’ earnings forecasts. Design/methodology/approach – Using a sample of 3,584 yearly management earnings per share (EPS) forecasts and 10,287 quarterly management EPS forecasts made during the period of 2002-2007 and collected from the First Call database, the authors controlled for factors previously found to impact analysts’ forecast accuracy and dispersion and investigate the link between management forecast precision and attributes of the analysts’ forecasts. Findings – Results provide empirical evidence that managements’ disclosure precision has a statistically significant impact on both the dispersion and the accuracy of subsequent analysts’ forecasts. It was found that the dispersion in analysts’ forecasts is negatively related to the management forecast precision. In other words, a precise management forecast is associated with a smaller dispersion in the subsequent analysts’ forecasts. Evidence consistent with accuracy in subsequent analysts’ forecasts being positively associated with the precision in the management forecast was also found. When the present analysis focuses on range forecasts provided by management, it was found that lower precision (a larger range) is associated with a larger dispersion among analysts and larger forecast errors. Practical implications – Evidence suggests a consistency in inferences across both annual and quarterly earnings forecasts by management. Accordingly, recent calls to eliminate earnings guidance through short-term quarterly management forecasts may have failed to consider the linkage between the attributes (precision) of those forecasts and the dispersion and accuracy in subsequent analysts’ forecasts. Originality/value – This study contributes to the literature on both management earnings forecasts and analysts’ earnings forecasts. The results assist in policy deliberations related to calls to eliminate short-term management earnings guidance.

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