Are Analysts Over-Optimistic Around Seasoned Equity Offerings

Abstract

We examine analysts' earnings forecast behavior around SEOs. We document that equity issuers are among the high growth IBES firms that typically have much higher forecast errors. Adjusting for this bias we find that earnings per share forecasts around equity offerings are not more favorable than forecasts for other high growth firms. Further, analysts forecasts of issuers' long run growth prospects around the SEOs are not more favorable than those of other high growth firms. This suggests that abnormal forecasts observed around equity issuance, for either short run or long run forecasts, is not unique but is instead a phenomenon that is common to high growth firms. They are not consistent with the hypothesis that equity offerings coincide with a period of overly favorable earnings expectations. We also find that firm management increases in discretionary reported earnings around SEOs, which are viewed as a proxy for earnings manipulation, do not have a significant effect on earnings forecasts. These results are consistent with analysts and their investment banks behaving credibly around SEOs. The results do not agree with the notions that management has foresight of investors' irrationally optimistic earnings expectations when their firm issues equity, and that they can influence those expectations through inflating non-cash components of reported earnings.