Are Analysts Over-Optimistic Around Seasoned Equity Offerings

44 Pages Posted: 20 Jan 1999

See all articles by Robert S. Hansen

Robert S. Hansen

Tulane University - A.B. Freeman School of Business

Atulya Sarin

Santa Clara University - Department of Finance

Date Written: November 14, 1998

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.

Suggested Citation

Hansen, Robert S. and Sarin, Atulya, Are Analysts Over-Optimistic Around Seasoned Equity Offerings (November 14, 1998). Available at SSRN: https://ssrn.com/abstract=140435 or http://dx.doi.org/10.2139/ssrn.140435

Robert S. Hansen (Contact Author)

Tulane University - A.B. Freeman School of Business ( email )

Goldring/Woldenberg Hall
7 McAllister Blvd.
New Orleans, LA 70118
United States
504-865-5624 (Phone)

Atulya Sarin

Santa Clara University - Department of Finance ( email )

Leavey School of Business and Administration
Santa Clara, CA 95053
United States
408-554-4953 (Phone)
408-904-4498 (Fax)

HOME PAGE: http://business.scu.edu/asarin

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