The Effect of Issuing Biased Earnings Forecasts on Analysts' Access to Management and Survival

Authors


  • We thank an anonymous reviewer, Anil Arya, Larry Brown, Steve Huddart, Artur Hugon, Henry Y. Lo, Jim McKeown, Drew Newman, and workshop participants at the 2005 American Accounting Association FARS mid-year meeting and annual meeting, Chinese University of Hong Kong, the 12th Conference on the Theories and Practices of Securities and Financial Markets held at the National Sun Yat-sen University (Kaohsiung, Taiwan), University of Colorado (Boulder), Ohio State University, and Pennsylvania State University for helpful comments. We thank I/B/E/S for providing the earnings forecast data. Bin Ke acknowledges the research support of the Smeal College of Business.

ABSTRACT

This study offers evidence on the earnings forecast bias analysts use to please firm management and the associated benefits they obtain from issuing such biased forecasts in the years prior to Regulation Fair Disclosure. Analysts who issue initial optimistic earnings forecasts followed by pessimistic earnings forecasts before the earnings announcement produce more accurate earnings forecasts and are less likely to be fired by their employers. The effect of such biased earnings forecasts on forecast accuracy and firing is stronger for analysts who follow firms with heavy insider selling and hard-to-predict earnings. The above results hold regardless of whether a brokerage firm has investment banking business or not. These results are consistent with the hypothesis that analysts use biased earnings forecasts to curry favor with firm management in order to obtain better access to management's private information.

Ancillary