A Temporal Analysis of Expectation Management: Evidence from Public Management Earnings Forecasts

• In Event: Earnings Management and Disclosure

Abstract

We investigate the time trend of expectation management through public management earnings forecasts to avoid negative earnings surprise during the 20-year period from 1995 to 2014. We find that the percentage of firms missing analyst earnings target before downward management guidance but meeting revised analyst earnings target have more than tripled from 5.5% in 1995 to 20.0% in 2014. We also show temporal increase of both the magnitude of pessimistic management forecast bias and analysts’ tendency to converge to management guidance, two potential explanations for increasing expectation management. The temporal increase in analyst convergence is more prominent for firms with larger downward bias in previous management forecasts. In addition, because the accuracy of downward management guidance relative to individual analysts’ initial forecasts has declined over time, an increasing number of analysts sacrifice the accuracy of their earnings forecasts by converging to downward management guidance.

Authors

• Dana Zhang, Susquehanna University

• BO LIU, SUSQUEHANNA UNIVERSITY