Are Affiliated Analysts More Likely than Unaffiliated Analysts to Provide Eps Forecasts that Management Can Meet or Beat?

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 affiliated analysts with achievable forecasts generate future investment banking business, but do not improve their future forecast accuracy. We also find some evidence that management could gain from affiliated analysts' achievable EPS forecasts because of their influence on unaffiliated analysts' forecast revisions. Collectively, these findings support the view that analysts whose employers maintain close ties to a firm keep their EPS forecasts at an achievable level to obtain future investment banking business.