Do Analysts Act Strategically to Induce Management Guidance? Evidence from the Post-Reg FD Period

• In Event: Financial Accounting & Reporting I - Disclosure (75 mins)

Abstract

I examine whether, and to what extent, analysts strategically issue optimistic forecasts to induce management guidance in the post-reg FD period, when private communication is prohibited. I hypothesize that in rational anticipation of managerial incentive to meet or beat earnings targets, analysts may strategically withhold their unfavorable initial forecasts in an effort to induce managers’ guidance. Supporting this prediction, I find that analysts’ initial forecasts are more optimistic for firms that are less likely to guide. Further, I show that this negative relation is less pronounced when there are more analysts forecasting the same firm and essentially becomes insignificant when the number of analyst following exceeds 10 (Free-riding effect). This finding suggests that public goods aspect of management guidance results in free-rider problems creating circumstances in which analysts’ incentives to issue optimistic forecast are insufficient. Finally, I examine a subset of firms whose guidance decisions are unlikely to be influenced by analyst forecast. I find that the negative relation between initial optimism and management guidance does not exist for firms that guide regularly or rarely (Ceiling, Floor effects). My study provides new evidence of how analysts act strategically to induce public information and contributes to the further understanding of the effect of Reg FD on the relation between analysts and managers.

Author

• Jie Zhou, National University of Singapore