Determinants of Managerial Earnings Guidance Prior to Regulation Fair Disclosure and Bias in Analysts' Earnings Forecasts*

Authors


  • *

    Accepted by Peter Easton. I gratefully acknowledge funding from the Division of Research, Harvard Business School. I thank Sudipta Basu, Mark Bradshaw, Patricia Dechow, Peter Easton (associate editor), Paul Healy, Bob Holthausen, Dawn Matsumoto, Greg Miller, Patricia O'Brien, Abbie Smith, Ross Watts, Jerry Zimmerman, and two anonymous referees for useful comments. I also thank workshop participants at the University of Rochester, Massachusetts Institute of Technology, Harvard Business School, the London Business School's Summer Symposium, the University of Washington, and Emory University for their useful comments. I thank Chris Allen, Sarah Eriksen, Kathleen Ryan, James Zeitler, Robert Burnham, and Paul Wolfson for their research assistance. I thank the National Investor Relations Institute for the survey data on firms' corporate disclosure practices and I/B/E/S-First Call for analyst forecast data.

Abstract

Prior to Regulation Fair Disclosure (“Reg FD”), some management privately guided analyst earnings estimates, often through detailed reviews of analysts' earnings models. In this paper I use proprietary survey data from the National Investor Relations Institute to identify firms that reviewed analysts' earnings models prior to Reg FD and those that did not. Under the maintained assumption that firms conducting reviews guided analysts' earnings forecasts, I document firm characteristics associated with the decision to provide private earnings guidance. Then I document the characteristics of “guided” versus “unguided” analyst earnings forecasts. Findings demonstrate an association between several firm characteristics and guidance practices: managers are more likely to review analyst earnings models when the firm's stock is highly followed by analysts and largely held by institutions, when the firm's market-to-book ratio is high, and its earnings are important to valuation but hard to predict because its business is complex. A comparison of guided and unguided quarterly forecasts indicates that guided analyst estimates are more accurate, but also more frequently pessimistic. An examination of analysts' annual earnings forecasts over the fiscal year does not distinguish between guidance and no-guidance firms; both experience a “walk-down” in annual estimates. To distinguish between guidance and no-guidance firms, one must examine quarterly earnings news: unguided analysts walk down their annual estimates when the majority of the quarterly earnings news is negative; guided analysts walk down their annual estimates even though the majority of the quarterly earnings news is positive.

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