Analysts’ Forecasts During Forced CEO Changes
Macquarie University - Faculty of Business and Economics; Financial Research Network (FIRN)
affiliation not provided to SSRN
Macquarie University, Faculty of Business and Economics
Ka Wai (Stanley) Choi
Australian National University (ANU) - College of Business and Economics
December 12, 2010
Finance and Corporate Governance Conference 2011 Paper
Purpose: The purpose of this paper is to examine analysts’ earnings forecasts during a period of heightened uncertainty and forecasting complexity, that of a forced change of CEO. How well do analysts utilise their information advantage to reduce information uncertainty between management and investors?
Design/Methodology/Approach: This paper uses a sample of Australian companies that are followed by analysts between 1999 and 2009, to examine the relation between properties of analysts’ forecasts (accuracy, dispersion, coverage and bias) and forced CEO turnover.
Findings: Relative to firms not undergoing CEO changes, forecasting accuracy is lower and earnings forecasts are more optimistic for firms experiencing forced CEO turnover. However dispersion and analyst coverage are not statistically different. The results are consistent with the management insider information access hypothesis, in which analysts use optimistic earnings forecasts to curry favour with firm management.
Practical Implications: Forced CEO turnover events provide a challenge to the forecasting environment for analysts. During CEO changes, investors should be aware that forecasts are less accurate and have an optimistic bias.
Originality/Value: Whilst the literature has examined analysts’ earnings forecast properties in a number of contexts that change forecast complexity, this paper is the first to examine an extensive range of forecast properties in the context of CEO changes.
Number of Pages in PDF File: 44
Keywords: analysts forecasts, forced CEO change, forecast accuracy, forecast bias, analyst coverage, forecast dispersion
JEL Classification: G14, G34, M41
Date posted: December 29, 2010