An examination of the effects of management earnings forecast form and explanations on financial analyst forecast revisions

Using a sample of 978 quarterly management earnings-per-share forecasts made during the period 1993 to 1999, we document that financial analyst revisions to management earnings forecasts are a function of management forecast form. More precise forecasts (measured three different ways) lead to greater revision of financial analyst consensus EPS forecasts for a given level of unexpected earnings as predicted by Kim and Verrecchia (1991) and Bayesian adjustment models. Also, consistent with our arguments, maximum forecasts are interpreted as bad news by analysts. Our results, while consistent with theory, are inconsistent with recent experimental studies which do not reject the null hypothesis of no effect of management earnings forecast form on the association between unexpected earnings and financial analyst forecast revisions. We also re-examine Baginski, Hassell, and Kimbrough's (2004) finding that attributions used to explain management forecasts affect the reaction to the forecast using analyst data. Consistent with their findings using stock prices, the attribution presence (especially external attributions) increases financial analyst revisions pursuant to management forecasts.