An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Bok Baik
Florida State University

Han Yi
The University of Oklahoma

Abstract: We examine analysts’ incentive to avoid negative earnings surprises by testing the effect of investment banking relationships on analysts’ tendency to issue EPS forecasts that management ultimately can meet or beat. Using 19,014 sample firm-quarters for the 1991-2002 period, we find that firms meet or exceed affiliated analysts' EPS forecasts 6% more often than unaffiliated analysts' EPS forecasts. This tendency is more pronounced for firms with a strong investment bank relationship and firms with a limited ability to manage earnings. We further report that non-negative earnings surprises predict future investment banking business. However, investors appear to discount affiliated analysts' non-negative earnings surprises. Collectively, our evidence suggests that analysts, whose employers maintain close ties to a firm, keep their EPS forecasts at an achievable level to obtain future investment banking business.

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