An Empirical Examination of the Divergence between Managers’ and Analysts’ Earnings Forecasts

55 Pages Posted: 5 Jan 2018

See all articles by Somnath Das

Somnath Das

University of Illinois at Chicago

Kyonghee Kim

Michigan State University

Sukesh Patro

Northern Illinois University

Date Written: September 18, 2013

Abstract

We study circumstances when analysts’ forecasts diverge from managers’ forecasts after management guidance, and the consequences of this divergence for investors and analysts. Our results show that investors’ return response to earnings surprises based on analyst forecasts is significantly weaker when analyst and management forecasts diverge, and that this attenuating effect is stronger when the management forecast is more credible. When the divergent management forecast is more accurate than the analyst consensus forecast, the subsequent-quarter analyst consensus forecast is significantly more accurate than that of the current quarter, and exhibits less serial correlation. Overall, our findings suggest that, when analyst and management forecasts diverge, investors find the two sources to contain complementary information, and analysts learn to improve their subsequent forecasts.

Keywords: Earnings forecasts, Earnings benchmarks, Forecast divergence, Earnings announcement return

JEL Classification: G14, M41

Suggested Citation

Das, Somnath and Kim, Kyonghee and Patro, Sukesh, An Empirical Examination of the Divergence between Managers’ and Analysts’ Earnings Forecasts (September 18, 2013). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2327769

Somnath Das

University of Illinois at Chicago ( email )

601 South Morgan Street
University Hall, Room 2303
Chicago, IL 60607
United States
312-996-4482 (Phone)
312-996-4520 (Fax)

Kyonghee Kim (Contact Author)

Michigan State University ( email )

N206 North Business Complex
632 Bogue Street
East Lansing, MI 48824
United States
517-432-2920 (Phone)

Sukesh Patro

Northern Illinois University ( email )

236P Barsema Hall
DeKalb, IL 60115
United States
8157531354 (Phone)

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