Abstract

http://ssrn.com/abstract=281196
 
 

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


Scott A. Richardson


London Business School; AQR Capital Management, LLC

Siew Hong Teoh


University of California - Paul Merage School of Business

Peter D. Wysocki


University of Miami - School of Business Administration

August 2001

MIT Sloan Working Paper No. 4221-01; AFA 2002 Atlanta Meetings

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.

Number of Pages in PDF File: 44

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

JEL Classification: G14, M41, G29

working papers series


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Date posted: September 19, 2001  

Suggested Citation

Richardson, Scott A. 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). MIT Sloan Working Paper No. 4221-01; AFA 2002 Atlanta Meetings. Available at SSRN: http://ssrn.com/abstract=281196 or http://dx.doi.org/10.2139/ssrn.281196

Contact Information

Scott Anthony Richardson (Contact Author)
London Business School ( email )
Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
AQR Capital Management, LLC ( email )
Greenwich, CT
United States
Siew Hong Teoh
University of California - Paul Merage School of Business ( email )
Irvine, CA California 92697-3125
United States
Peter D. Wysocki
University of Miami - School of Business Administration ( email )
Department of Accounting - K/E 308
5250 University Drive
Coral Gables, FL 33146-6531
United States
305-284-8618 (Phone)
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