Do Analysts Warn Investors about Future Breaks in Earnings Strings?

• In Event: Accounting Information Systems

Abstract

This study investigates the behavior of sell-side analysts covering firms that are about to experience breaks in strings of consecutive quarterly earnings increases. We offer evidence that analysts are able to predict breaks in earnings strings by issuing less favorable recommendations and lower earnings estimates ahead of the break announcement. However, we find that analyst issuances of earnings forecasts and investment recommendations around breaks are driven by radically different considerations. The earnings forecasts reflect short-term perspective to predict a break in a specific quarter (driven by accuracy goal), whereas investment recommendations are based on long-term evaluation of the growth prospects of the firm (future-oriented). We find that analysts’ warnings are heeded by investors and result in a less severe reaction to the break announcements.

Authors

• Zhanel DeVides, Rutgers University - Camden

• Vadim Balashov, Rutgers University - Camden