Do Analysts Sacrifice Forecast Accuracy for Informativeness?

Management Science, Forthcoming

Posted: 16 Sep 2012  

Henock Louis

Pennsylvania State University - Smeal College of Business

Amy X. Sun

University of Houston

Oktay Urcan

University of Illinois at Urbana-Champaign

Multiple version iconThere are 2 versions of this paper

Date Written: September 15, 2012

Abstract

We analyze whether analysts sacrifice forecast accuracy for informativeness by examining: (1) the association between analysts’ deviations from management guidance and earnings management; (2) the effect of the deviations on analyst forecast accuracy; and (3) the effect of the deviations on prices. The evidence indicates that analysts apparently deviate from management guidance to correct for perceived earnings management. Although the deviations reduce the analysts’ forecast accuracy, they improve the informativeness of their earnings estimates. More specifically, they bring the analysts’ estimates closer to the true (unmanaged) earnings number and reduce mispricing. An implicit assumption in the literature is that more accurate analyst forecasts (i.e., earnings estimates that are closer to the actual reported earnings) are better for investors, and that analysts’ primary objective is to forecast the reported (managed) earnings number accurately. Our analysis suggests that this is not necessarily the case and that an inaccurate forecast can actually be more informative than an accurate one. Prior studies on analyst deviations from management guidance focus on analysts’ incentives to provide earnings estimates that managers can beat. These studies implicitly assume that analysts side with management against the interests of their clients. Our analysis indicates that analysts could also deviate from management guidance to provide useful valuation information to their clients.

Keywords: Analyst forecast informativeness, Forecast accuracy, Earnings management, Management forecasts

JEL Classification: G14, M41

Suggested Citation

Louis, Henock and Sun, Amy X. and Urcan, Oktay, Do Analysts Sacrifice Forecast Accuracy for Informativeness? (September 15, 2012). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2147210

Henock Louis (Contact Author)

Pennsylvania State University - Smeal College of Business ( email )

University Park, PA 16802-3306
United States
814-865-4160 (Phone)
814-863-8393 (Fax)

Amy X. Sun

University of Houston ( email )

Bauer College of Business
334 Melcher Hall, 390H
Houston, TX 77204
United States
7137435682 (Phone)

Oktay Urcan

University of Illinois at Urbana-Champaign ( email )

1206 S. Sixth Street
Champaign, IL 61820
United States
217-265-0383 (Phone)
217-244-0902 (Fax)

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