The Walk-Down to Beatable Analyst Forecasts: The Role of Equity Issuance and Insider Trading Incentives

Posted: 3 Mar 2004

See all articles by Scott A. Richardson

Scott A. Richardson

AQR Capital Management, LLC; London Business School

Siew Hong Teoh

University of California, Irvine - Accounting Area

Peter D. Wysocki

Boston University Questrom School of Business

Abstract

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

Richardson, Scott Anthony and Teoh, Siew Hong and Wysocki, Peter D., The Walk-Down to Beatable Analyst Forecasts: The Role of Equity Issuance and Insider Trading Incentives. Contemporary Accounting Research, Vol. 21, No. 4, pp. 885-924. Available at SSRN: https://ssrn.com/abstract=508943

Scott Anthony Richardson

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Siew Hong Teoh

University of California, Irvine - Accounting Area ( email )

Irvine, CA 92697-3125
United States

Peter D. Wysocki (Contact Author)

Boston University Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

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