Amy Hutton
Dartmouth College
Abstract: Prior to Regulation Fair Disclosure (Reg FD) some management spent considerable time and effort guiding analyst earnings estimates, often through detailed reviews of analysts earnings models. In this paper I use proprietary survey data from the National Investor Relations Institute to identify firms that reviewed analysts earnings models prior to Reg FD and those that did not. Under the maintained assumption that firms conducting reviews implicitly or explicitly guided analysts earnings forecasts, I document firm characteristics associated with the decision to provide guidance and I document the characteristics of guided versus unguided analyst forecasts. Findings demonstrate an association between several firm characteristics and guidance practices: managers are more likely to review analyst earnings models when earnings are important to valuation but hard to forecast, when the firm operates in many business segments, and it has a high percentage of intangible assets. A comparison of guided and unguided analyst forecasts indicates that guided quarterly earnings forecasts are more accurate but also more frequently pessimistic, consistent with analysts rationally trading off bias for accuracy to retain access to managements earnings guidance. Cross-sample comparisons of stock recommendations and long-term growth forecasts indicate that analysts are more likely to report selectively (ala McNichols and OBrien 1997) when management provides reviews of analyst earnings models. Finally, evidence from stock price reactions to deviations from the consensus forecast (the traditional measure of earnings surprises) indicates that investors distinguish between guided and unguided analyst forecasts when forming their earnings expectations.
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