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
MIT Sloan Working Paper No. 4221-01; AFA 2002 Atlanta Meetings
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
Date posted: September 19, 2001
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