The use of management forecasts to dampen analysts’ expectations

We examine whether management dampens analysts’ earnings expectations by issuing pessimistic management forecasts. We also investigate what firm characteristics are related to this pessimistic bias in management forecasts. Results show that there is pervasive pessimistic bias in management forecasts, and as a result, management successfully induces analysts to lower their earnings expectations to an achievable level. Furthermore, results suggest that companies with high transient institutional ownership and a long string of meeting or beating expectations are more likely to issue pessimistic forecasts and companies incurring losses are less likely to issue pessimistic forecasts.