An Empirical Examination Of The Divergence Between Managers And Analysts Earnings Forecasts PDF Download

"I develop and explore a new dimension of earnings guidance - guidance consistency. Contrary to the conventional view that managers make an independent guidance decision each period, I find empirical support for the dynamic disclosure theory, which argues that managers consider earnings guidance as a multi-period decision and try to maintain consistency in guidance. Once I account for past guidance in a logistic model, several known guidance determinants are no longer significant in explaining management guidance decisions. In contrast, past guidance remains significant both statistically and economically across various specifications, suggesting that management guidance decisions are largely predetermined. Moreover, the guidance consistency measure is more robust than the conventional frequency-based 'habitual' variable in explaining future guidance. The results still hold in a Heckman selection model and after propensity score matching, mitigating the concern that guidance consistency is merely driven by firms operating in stable environments. Moreover, firms with a history of consistent (inconsistent) guidance are less (more) responsive to various guidance determinants, and omit guidance primarily due to lack of private information (past unsuccessful expectation management). Compared with inconsistent guiders, consistent guiders are more likely to: (a) guide earlier in the quarter; (b) bundle guidance with earnings announcements; (c) issue guidance even when analyst forecasts are already aligned with managers' own estimates; and (d) also maintain consistency in their guidance timing or specificity. After controlling for analyst forecasts before guidance, their forecasts after guidance are more likely to be aligned with guidance issued by consistent guiders than by inconsistent guiders. My evidence suggests that both managers and analysts view guidance as a multi-period decision, supporting the dynamic disclosure theory"--Page iv.