The Walk-Down to Beatable Analyst Forecasts: The Role of Equity Issuance and Insider Trading Incentives
Posted: 3 Mar 2004
It has been alleged that firms and analysts engage in an earnings guidance game where analysts first issue optimistic earnings forecasts and then 'walk down' their estimates to a level firms can beat at the official earnings announcement. We examine whether the walk-down to beatable targets is associated with managerial incentives to sell stock after earnings announcements on the firm's behalf (via new equity issuance) or from their personal accounts (through option exercises and stock sales). Consistent with these hypotheses, we find that the walk-down to beatable targets is most pronounced when firms or insiders are net sellers of stock after an earnings announcement. These findings provide new insights on the impact of capital market incentives on communications between managers and analysts.
Keywords: Earnings Announcement, Expectations Management, Insider Trading, Stock Options
JEL Classification: G29, M41, M43, M45
Suggested Citation: Suggested Citation