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Analysts’ Incentives to Follow Management Guidance:
The Case of Equity Issuances
Mei Feng, The University of Pittsburgh
Sarah McVay, New York University
ABSTRACT. We examine whether analysts follow managerial guidance more closely preceding equity issuances—when they have incentives to please management. We find that after controlling for known determinants, such as the credibility of the management forecast, analyst revisions more closely mimic management forecasts when firms issue equity in the next year. Moreover, we find that the ex post accuracy of the analysts’ forecasts suffer because of this mimicking behavior—the absolute value of analyst forecast errors is larger for firms announcing an equity issuance in the next year. Finally, we document that analysts appear to reap the benefits from this increased mimicking. While their forecast errors suffer, they benefit gaining the underwriting business. Thus, unlike long-term earnings forecasts, where analysts appear to be overly optimistic in order to gain favor, in the short-term, analysts appear to mimic managers to gain favor.
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