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A Theoretical Investigation into the Relative Accuracy of Management and Analyst Earnings Forecasts

  • Author(s): Trueman, Brett
  • et al.
Abstract

Over the past several years many researchers have empirically examined the issue of whether or not managerial earnings forecasts are more accurate than those prepared by security analysts. One result commonly found is that managerial forecasts which are released prior to analyst forecasts are at least as, if not more accurate than the posterior analyst forecasts. On the surface this seems paradoxical since analysts who release their forecasts after managerial forecast announcements are made have just as much, if not more, information with which to make a forecast than does the manager. The purpose of this paper is to provide one possible explanation for this paradox. As shown in the analysis here, analysts may be reluctant to revise their forecasts upon the receipt of new information because of the negative signal such a revision provides concerning the accuracy of their prior information. As a result, the amount of information held by analysts relative to that held by management will not be fully reflected in measures of forecast accuracy.

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