The Interactive Role of Difficulty and Incentives in Explaining the Annual Earnings Forecast Walkdown
Year: 2016
Type: article
Abstract: ABSTRACT The within-year walkdown of analysts' earnings forecasts has largely been attributed to analysts' incentives to curry favor with managers. We appeal to cognitive psychology literature on motivated reasoning and propose that forecasting difficulty interacts with such incentives to yield the observed walkdown. Higher forecasting difficulty generates a wider range of outcomes from which analysts can justify optimistically biased forecasts. In regression analyses, we find that the interaction between analysts' incentives for optimism and difficulty exhibits the strongest effect on earnings walkdowns. We also examine revenue forecasts as a benchmark of lower forecasting difficulty and find that revenue walkdowns are relatively diminutive. However, when analysts forecast losses, revenue forecasts are more critical and exhibit markedly steeper walkdowns. Our results suggest that analyst forecast walkdowns are better characterized by an interactive effect between analysts' strategic incentives for optimism and forecasting difficulty. JEL Classifications: G17; M41. Data Availability: Data are available from public sources identified in the text.
Source: The Accounting Review
DOI: 10.2308/accr-51398
Authors: Mark T Bradshaw, Lian Fen Lee, Kyle Peterson
Institutions: Boston College, University of Oregon
Language: English
Subfield: Accounting
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W215284397