Analysts’ Forecasts During Forced CEO Changes

Abstract

Purpose: The purpose of this paper is to examine analysts’ earnings forecasts during a period of heightened uncertainty and forecasting complexity, that of a forced change of CEO. How well do analysts utilise their information advantage to reduce information uncertainty between management and investors?

Design/Methodology/Approach: This paper uses a sample of Australian companies that are followed by analysts between 1999 and 2009, to examine the relation between properties of analysts’ forecasts (accuracy, dispersion, coverage and bias) and forced CEO turnover.

Findings: Relative to firms not undergoing CEO changes, forecasting accuracy is lower and earnings forecasts are more optimistic for firms experiencing forced CEO turnover. However dispersion and analyst coverage are not statistically different. The results are consistent with the management insider information access hypothesis, in which analysts use optimistic earnings forecasts to curry favour with firm management.

Practical Implications: Forced CEO turnover events provide a challenge to the forecasting environment for analysts. During CEO changes, investors should be aware that forecasts are less accurate and have an optimistic bias.

Originality/Value: Whilst the literature has examined analysts’ earnings forecast properties in a number of contexts that change forecast complexity, this paper is the first to examine an extensive range of forecast properties in the context of CEO changes.

Keywords: analysts forecasts, forced CEO change, forecast accuracy, forecast bias, analyst coverage, forecast dispersion

JEL Classification: G14, G34, M41