Expectations Management and Beatable Targets: How Do Analysts React to Explicit Earnings Guidance?*


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    Accepted by Greg Waymire. An earlier version of this paper was presented at the 2002 Contemporary Accounting Research Conference, generously supported by the CGA-Canada Research Foundation, the Canadian Institute of Chartered Accountants, CMA Canada — Ontario, the Certified General Accountants of Ontario, and the Institute of Chartered Accountants of Ontario. We would like to thank Stan Levine at First Call for providing the analyst and management forecast data and for helpful discussions. The comments of Sudipta Basu, Jeffrey Callen, Andreas Gintschel, Scott Richardson, Charles Wasley, Greg Waymire (associate editor), and two anonymous referees are gratefully acknowledged.


This study investigates security analysts' reactions to public management guidance and assesses whether managers successfully guide analysts toward beatable earnings targets. We use a panel data set between 1995 and 2001 to examine the fiscal-quarter-specific determinants of management guidance and the timing, extent, and outcomes of analysts' reactions to this guidance. We find that management guidance is more likely when analysts' initial forecasts are optimistic, and, after controlling for the level of this optimism, when analysts' forecast dispersion is low. Analysts quickly react to management guidance and are more likely to issue final meetable or beatable earnings targets when management provides public guidance. Our evidence suggests that public management guidance plays an important role in leading analysts toward achievable earnings targets.