The Relation between Analysts' Forecasts of Long-Term Earnings Growth and Stock Price Performance Following Equity Offerings*


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    Accepted by Gord Richardson. This paper was presented at the 1998 Contemporary Accounting Research Conference, generously sponsored by the CGA-Canada Research Foundation, the Canadian Institute of Chartered Accountants, the Certified Management Accounts Society of British Columbia, the Institute of Chartered Accountants of British Columbia, and the Society of Management Accountants of Canada. We thank Chris Allen, Sarah Eriksen, and Sarah Woolverton for their research assistance. We are grateful for the comments and suggestions of two anonymous referees, S.P. Kothari (the discussant), Gordon Richardson (the editor), and participants of the 1998 Contemporary Accounting Research Conference. We also are grateful for the comments of participants in the summer research colloquiums at Harvard University and Stanford University and workshops at the University of California at Berkeley, Emory University, the University of Georgia, the University of Illinois at Urbana-Champaign, the University of Michigan, University of North Carolina at Chapel Hill, Washington University, and University of Waterloo. We thank Institutional-Broker-Estimates-System (I/B/E/S) for providing earnings forecast data.


In this paper we evaluate the role of sell-side analysts' long-term earnings growth forecasts in the pricing of common equity offerings. We find that, in general, sell-side analysts' long-term growth forecasts are systematically overly optimistic around equity offerings and that analysts employed by the lead managers of the offerings make the most optimistic growth forecasts. In additional, we find a positive relation between the fees paid to the affiliated analysts' employers and the level of the affiliated analysts' growth forecasts. We also document that the post-offering underperformance is most pronounced for firms with the highest growth forecasts made by affiliated analysts. Finally, we demonstrate that the post-offering underperformance disappears once we control for the overoptimism in earnings growth expectations. Thus, the evidence presented in this paper is consistent with the “equity issue puzzle” arising from overly optimistic earnings growth expectations held at the time of the offerings.