To Blame or Not to Blame: Analysts' Reactions to External Explanations for Poor Financial Performance

39 Pages Posted: 20 Jun 2004

See all articles by Jan Barton

Jan Barton

Emory University

Molly Mercer

DePaul University

Date Written: May 10, 2004

Abstract

Managers often provide self-serving disclosures that blame poor financial performance on temporary, external factors. Results of an experiment conducted with 124 financial analysts suggest that when analysts perceive such disclosures as plausible, they provide higher earnings forecasts and stock valuations than if the explanation had not been provided. However, we also show that these disclosures can backfire if analysts find them implausible. Specifically, implausible external explanations for poor performance lead analysts to provide lower earnings forecasts and assess a higher cost of capital than if the explanation had not been provided.

Keywords: Voluntary disclosure, management explanations, financial analysts' earnings forecasts, management reputation, financial reporting credibility

JEL Classification: G29, M41, M45

Suggested Citation

Barton, Jan and Mercer, Molly, To Blame or Not to Blame: Analysts' Reactions to External Explanations for Poor Financial Performance (May 10, 2004). Available at SSRN: https://ssrn.com/abstract=556834 or http://dx.doi.org/10.2139/ssrn.556834

Jan Barton (Contact Author)

Emory University ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States
404-727-6398 (Phone)
404-727-6313 (Fax)

Molly Mercer

DePaul University ( email )

1 E Jackson Blvd Suite 6000
Chicago, IL 60604
United States
(312)362-8956 (Phone)

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