Analysts' Incentives to Follow Management Guidance: The Case of Equity Offerings

Abstract:     
We examine whether analysts follow managerial guidance more closely when they have incentives to please management - preceding equity offerings. After controlling for known determinants, such as the credibility of the management forecast, we find that analyst revisions more closely mimic management forecasts when firms issue equity in the next year. We also show that the ex post accuracy of the analysts' forecasts are less accurate due to mimicking - the absolute value of analysts' forecast errors are larger for firms announcing an equity offering in the next year and these errors are associated with the abnormal degree of mimicking by analysts prior to the equity offering. Finally, we document that analysts appear to benefit from mimicking management guidance. While their forecasts are less accurate, they benefit by increasing their probability of gaining the underwriting business for the equity issuance. Thus, unlike long-term earnings forecasts, where analysts appear to be overly optimistic, in the short-term, analysts appear to mimic managerial forecasts to please management.

Keywords: Management Forecasts, Analyst Responsiveness, SEOs

JEL Classifications: M41

Working Paper Series