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The Walk‐down to Beatable Analyst Forecasts: The Role of Equity Issuance and Insider Trading Incentives *
Author(s) -
RICHARDSON SCOTT,
TEOH SIEW HONG,
WYSOCKI PETER D.
Publication year - 2004
Publication title -
contemporary accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.769
H-Index - 99
eISSN - 1911-3846
pISSN - 0823-9150
DOI - 10.1506/khnw-pjyl-adub-0rp6
Subject(s) - earnings , incentive , insider , equity (law) , insider trading , stock (firearms) , business , earnings surprise , monetary economics , earnings per share , economics , financial economics , accounting , finance , post earnings announcement drift , microeconomics , mechanical engineering , political science , law , engineering
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.