Analyst Coverage and the Likelihood of Meeting or Beating Analyst Earnings Forecasts

43 Pages Posted: 11 Feb 2017

See all articles by Shawn X. Huang

Shawn X. Huang

Arizona State University (ASU) - School of Accountancy

Raynolde Pereira

University of Missouri at Columbia - School of Accountancy

Changjiang (John) Wang

University of Cincinnati - Department of Accounting

Date Written: December 12, 2016

Abstract

This paper examines the relation between analyst coverage and whether firms meet or beat analyst earnings forecasts. We distinguish between whether a firm’s reported quarterly earnings meet (i.e., equal or exceed by one cent) or beat (i.e., exceed by more than one cent) its consensus analyst earnings forecasts. We find a positive relation between analyst coverage and whether a firm meets or beats analyst forecasts. However, the more pronounced relation is that between analyst coverage and meeting analyst forecasts. Also, when we consider exogenous shocks to analyst coverage due to brokerage mergers or closures and conglomerate spinoffs, we continue to find a robust positive relation only between analyst coverage and meeting analyst forecasts. To shed light on the causal relation involved, we examine and find that greater analyst coverage is associated with a significantly larger market reaction to negative earnings surprises. We also document that firms with greater analyst coverage are more likely to guide analyst earnings forecasts downwards. Taken together, our evidence suggests that greater analyst coverage raises the pressure on managers to meet analyst earnings forecasts.

Keywords: Analyst Coverage, Forecast Bias, Forecast Guidance, Earnings Benchmarks, Managerial Myopia

JEL Classification: G24

Suggested Citation

Huang, Shawn X. and Pereira, Raynolde and Wang, Changjiang (John), Analyst Coverage and the Likelihood of Meeting or Beating Analyst Earnings Forecasts (December 12, 2016). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2915165 or http://dx.doi.org/10.2139/ssrn.2915165

Shawn X. Huang (Contact Author)

Arizona State University (ASU) - School of Accountancy ( email )

Tempe, AZ 85287
United States

Raynolde Pereira

University of Missouri at Columbia - School of Accountancy ( email )

337 Cornell Hall
Columbia, MO 65211
United States
573-882-6253 (Phone)

Changjiang (John) Wang

University of Cincinnati - Department of Accounting ( email )

Cincinnati, OH 45221-0211
United States

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