The Walkdown to Beatable Analyst Forecasts: The Roles of Equity Issuance and Insider Trading Incentives

44 Pages Posted: 19 Sep 2001

See all articles by Scott A. Richardson

Scott A. Richardson

London Business School; Acadian Asset Management

Siew Hong Teoh

UCLA Anderson School of Management

Peter D. Wysocki

Boston University Questrom School of Business

Date Written: August 2001

Abstract

Security regulators and the business press have alleged that firms play an 'earnings-guidance game' where analysts make optimistic forecasts at the start of the year and then 'walk down' their estimates to a level the firm can beat by the end of the year. In a comprehensive sample of I/B/E/S individual analysts' forecasts of annual earnings from 1983-1998, we find strong support for the claim in the post-1992 period. We examine whether the 'walk down' to beatable targets is associated with managers' incentives to sell stock after earnings announcements on the firm's behalf (via new equity issuance) or from their personal accounts (insider trades). Consistent with these hypotheses, we find that the 'walk down' to beatable targets is most pronounced in firms that are either net issuers of equity or in firms where managers are net sellers of stock after an earnings announcement. These findings provide new insights on how capital market incentives affect communications between managers and analysts.

Keywords: Analyst forecasts; Benchmark beating; Pessimism; Optimism; Walkdown; Equity issuance; Insider trading; Earnings guidance; Disclosure; Earnings surprise; Forecast error

JEL Classification: G14, M41, G29

Suggested Citation

Richardson, Scott Anthony and Teoh, Siew Hong and Wysocki, Peter D., The Walkdown to Beatable Analyst Forecasts: The Roles of Equity Issuance and Insider Trading Incentives (August 2001). Available at SSRN: https://ssrn.com/abstract=281196 or http://dx.doi.org/10.2139/ssrn.281196

Scott Anthony Richardson (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Acadian Asset Management ( email )

260 Franklin Street
Boston, MA 02110
United States

Siew Hong Teoh

UCLA Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

HOME PAGE: http://www.anderson.ucla.edu/faculty-and-research/accounting/faculty/teoh

Peter D. Wysocki

Boston University Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

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