Do Management Forecasts Dampen Analysts' Expectations?

Abstract

We examine whether management dampens analysts' earnings expectations by issuing pessimistic management forecasts. We also investigate what firm characteristics are related to this pessimistic bias in management forecasts. Results show that there is pervasive pessimistic bias in management forecasts, and as a result, management successfully induces analysts to lower their earnings expectation to an achievable level. Furthermore, results suggest that companies with high growth prospects, high transient institutional ownership, and a long string of meeting or beating expectations are more likely to issue pessimistic forecasts to dampen analysts' expectations.

Keywords: Management Forecasts, Earnings Guidance, Pessimism in Analyst Forecasts

JEL Classification: G14, M41