Review of Finance Advance Access originally published online on June 1, 2007
Review of Finance 2007 11(2):287-324; doi:10.1093/rof/rfm015
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The Dynamics of Earnings Forecast Management*
1 University of Illinois
2 University of Illinois and NBER
This paper examines whether firms manage analyst forecasts and the associated value consequences. We find that earnings forecasts tend to grow pessimistic over the forecast horizon and these forecast changes and their timing are key determinants of whether firms generate positive earnings surprises: Late forecasts that raise (lower) the consensus sharply reduce (raise) the probability of positive surprises. This findng is the opposite of that predicted if consensus revisions reflected new information arrival. Investors seem to be "misled": downward consensus revisions lead to large abnormal returns following the earnings announcement. Paradoxically, downward forecast management reduces post-announcement share price, as the impact of reduced forecasts dominates the gain from generating positive surprises.
JEL Classification: G14
* We thank Heitor Almeida, Kirt Butler, Long Chen, and Patricia O'Brien for helpful suggestions. Comments from seminar participants at the University of British Columbia, University of Colorado, University of Illinois, University of Victoria, and University of Waterloo are also appreciated. Data on analyst forecasts was provided by I/B/E/S International Inc. The usual disclaimer applies.