The walk-down to beatable analyst forecasts: The role of equity issuance and insider trading incentives

Scott Richardson, Siew Hong Teoh, Peter D. Wysocki

Research output: Contribution to journalReview article

326 Scopus citations

Abstract

It has been alleged that firms and analysts engage in an "earnings-guidance game" where analysts first issue optimistic earnings forecasts and then "walk down" their estimates to a level that firms can beat at the official earnings announcement. We examine whether the walk-down to beatable targets is associated with managerial incentives to sell stock after earnings announcements on the firm's behalf (through new equity issuance) or from their personal accounts (through option exercises and stock sales). Consistent with these hypotheses, we find that the walk-down to beatable targets is most pronounced when firms or insiders are net sellers of stock after an earnings announcement. These findings provide new insights on the impact of capital-market incentives on communications between managers and analysts.

Original languageEnglish (US)
Pages (from-to)885-924
Number of pages40
JournalContemporary Accounting Research
Volume21
Issue number4
DOIs
StatePublished - Dec 1 2004

Keywords

  • Analysts' forecasts
  • Earnings guidance
  • Insider trading
  • New equity issuance
  • Stock options

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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