Analyst Herding Around Management Forecasts

Abstract

This paper examines the effect of management forecasts on analyst forecasts in Japan. Almost all listed firms in Japan provide management forecasts. Thus, it is possible to investigate the relationship between management and analyst forecasts for Japanese firms without any special consideration of reasons behind the issuance of management forecasts. We first show that management forecasts provided by managers at the time of release of the prior year’s annual and current semi-annual financial results are slightly higher than analyst forecasts. The results suggest that managers have incentives to provide forecasts that exceed analyst forecasts. We then analyze the daily differences between management and analyst forecasts to investigate any convergence between the two forecasts upon the release of management forecasts. We conclude that analysts herd around management forecasts in Japan and tend to trust management forecasts because they believe that managers in Japanese firms are highly disciplined.