Are Affiliated Analysts More Likely than Unaffiliated Analysts to Provide Eps Forecasts that Management Can Meet or Beat?

51 Pages Posted: 3 Oct 2005

See all articles by Bok Baik

Bok Baik

Seoul National University

Han Yi

Korea University

Date Written: September 2007

Abstract

We examine analysts' incentive to avoid negative earnings surprises by testing the effect of investment banking relationships on analysts' tendency to issue EPS forecasts that management ultimately can meet or beat. Using 19,014 sample firm-quarters for the 1991-2002 period, we find that firms meet or exceed affiliated analysts' EPS forecasts 6% more often than unaffiliated analysts' EPS forecasts. This tendency is more pronounced for firms with a strong investment bank relationship and firms with a limited ability to manage earnings. We further report that affiliated analysts with achievable forecasts generate future investment banking business, but do not improve their future forecast accuracy. We also find some evidence that management could gain from affiliated analysts' achievable EPS forecasts because of their influence on unaffiliated analysts' forecast revisions. Collectively, these findings support the view that analysts whose employers maintain close ties to a firm keep their EPS forecasts at an achievable level to obtain future investment banking business.

Keywords: Analysts' Affiliation, Conflict of Interests, Earnings Forecast, Forecast Error Distribution, Earnings Benchmarks

Suggested Citation

Baik, Bok and Yi, Han, Are Affiliated Analysts More Likely than Unaffiliated Analysts to Provide Eps Forecasts that Management Can Meet or Beat? (September 2007). AAA 2006 Financial Accounting and Reporting Section (FARS) Meeting Paper. Available at SSRN: https://ssrn.com/abstract=817569 or http://dx.doi.org/10.2139/ssrn.817569

Bok Baik

Seoul National University ( email )

Seoul
Kwanak-gu
Seoul, 151-742
Korea, Republic of (South Korea)

Han Yi (Contact Author)

Korea University ( email )

Main Business Building 402
Korea University Business School
Seoul, 136-701
+82-2-3290-2629 (Phone)

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