When do Analysts Adjust for Biases in Management Guidance? Effects of Guidance Track Record and Analysts' Incentives
Nanyang Technological University (NTU) - Division of Accounting
Cornell University - Samuel Curtis Johnson Graduate School of Management
James E. Hunton
Bentley University - Department of Accountancy; Erasmus University
March 23, 2009
Contemporary Accounting Research, Forthcoming
Prior research indicates that analysts do not fully adjust for the general downward bias in earnings guidance issued by management. We report the results of two experiments designed to investigate how guidance track record and analysts' incentives jointly explain the extent to which analysts adjust for guidance bias. Our results suggest that analysts with accuracy incentives adjust for management's track record of downwardly-biased guidance when the bias is relatively small (one cent), but those with relationship incentives do not. Furthermore, the difference in adjustment is larger when the bias track record is inconsistent than when it is consistent. Also, when guidance bias is larger (two cents) relative to smaller (one cent), analysts with relationship incentives partially adjust, as they appear to strike a balance between accuracy and their desire to please management. These findings hold implications for investors, regulators, and the interpretation of prior research.
Keywords: management earnings guidance, track record, incentives, analyst forecasts
JEL Classification: G29, C91, M41Accepted Paper Series
Date posted: March 23, 2009
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