History Matters: Individual Analysts' Responses to Quarterly Guidance

58 Pages Posted: 3 Jul 2008 Last revised: 7 Feb 2009

See all articles by Mark Bagnoli

Mark Bagnoli

Purdue University

Yinghua Li

Arizona State University (ASU) - School of Accountancy

Susan G. Watts

Purdue University

Date Written: February 2009

Abstract

We ask whether the history of interactions between a firm and its analysts affects management's quarterly earnings forecast decision and analysts' subsequent earnings estimate revisions. We show that the history of their interactions not only reflects their individual incentives but is also used to form expectations about current decisions. Specifically, guidance is more likely to be pessimistically biased if management has a history of offering pessimistic forecasts and if analysts have tended to respond passively (i.e., by mimicking guidance or revising in the direction indicated by management). Individual analysts are more likely to respond passively to management's current forecast if they have historically responded in such a manner or if management has tended to offer unbiased or accurate guidance. Analysts with superior earnings forecasting track records are less likely to respond passively to guidance that is pessimistically biased. Collectively, our results indicate that downward bias in quarterly guidance and information production by analysts depend on what management and analysts have learned about each other over time as reflected in their forecasting histories.

Keywords: Guidance, earnings warnings, analysts, earnings estimates, analyst forecasts, reputation

JEL Classification: G12, G14, G29, M41, M45

Suggested Citation

Bagnoli, Mark E. and Li, Yinghua and Watts, Susan G., History Matters: Individual Analysts' Responses to Quarterly Guidance (February 2009). Available at SSRN: https://ssrn.com/abstract=1155145 or http://dx.doi.org/10.2139/ssrn.1155145

Mark E. Bagnoli

Purdue University ( email )

Department of Accounting
West Lafayette, IN 47907-1310
United States
765-494-4484 (Phone)
765-496-1778 (Fax)

Yinghua Li

Arizona State University (ASU) - School of Accountancy ( email )

Tempe, AZ 85287
United States
480-965-5188 (Phone)

HOME PAGE: http://wpcarey.asu.edu/people/profile/2386522

Susan G. Watts (Contact Author)

Purdue University ( email )

West Lafayette, IN 47906
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
242
Abstract Views
1,990
Rank
229,839
PlumX Metrics