Do Analysts Sacrifice Forecast Accuracy for Informativeness?

Abstract

Analysts deviate from management guidance to correct for perceived earnings management. Although the deviations reduce forecast accuracy, they improve forecast informativeness, bringing the forecasts closer to the unmanaged earnings and reducing accruals mispricing. An implicit assumption in the literature is that more accurate analyst forecasts (i.e., estimates that are closer to the reported earnings) are better for investors, and that analysts' objective is to forecast the reported (managed) earnings accurately. Our analysis suggests that this is not necessarily the case and that an inaccurate forecast can actually be more informative than an accurate one. Prior studies on analysts' deviations from management guidance focus on analysts' incentives to issue estimates that managers can beat. These studies implicitly assume that analysts side with management against the interests of their clients. Our analysis indicates that analysts could also deviate from management guidance to provide useful valuation information to their clients. This paper was accepted by Mary Barth, accounting.