Do Managers Always Know Better? The Relative Accuracy of Management and Analyst Forecasts

Abstract

We examine the relative accuracy of management and analyst forecasts of annual EPS. We predict and find that analysts' information advantage resides at the macroeconomic level. They provide more accurate earnings forecasts than management when a firm's fortunes move in concert with macroeconomic factors such as Gross Domestic Product and energy costs. In contrast, we predict and find that management's information advantage resides at the firm level. Their forecasts are more accurate than analysts' when management's actions, which affect reported earnings, are difficult to anticipate by outsiders, such as when the firm's inventories are abnormally high or the firm has excess capacity or is experiencing a loss. Although analysts are commonly viewed as industry specialists, we fail to find evidence that analysts have an information advantage over managers at the industry level. The two have comparable abilities to forecast earnings for firms with revenues or earnings that are more synchronous with their industries. * Boston College, Carroll School of Management. Accepted by Douglas Skinner.We are grateful to the editor and an anonymous referee for their helpful comments and suggestions. We thank workshop participants at

How do analysts interpret management range forecasts?

“…important setting in the management forecast literature (e.g., Ajinkya et al, 2005;Gong et al, 2011;Rogers & Stocken, 2005;Hutton et al, 2012). Hence we focus on annual range forecasts.…”

Externalities of public firm presence: Evidence from private firms' investment decisions

“…Recently, Hutton et al (2012) show that analyst earnings forecasts are more accurate than management forecasts when the firms' earnings move in concert with macroeconomic factors, suggesting that analyst forecasts contain valuable information about the macro-economy.…”

“…Prior research finds that financial analysts play a significant role in analyzing firms' disclosures and providing additional insights about the firm and the industry (Asquith et al, 2005;Hutton et al, 2012;Kadan et al, 2012). For example, Kadan et al (2012) find that sell-side analysts provide detailed reports about each industry and that analyst industry rankings are significantly associated with the future industry performance.…”

Anticipation of management forecasts and analysts’ private information search

“…However, surprisingly little is known about how analysts form their forecasts prior to a management forecast. Hutton et al (2012) show that analysts' forecasts can be more accurate than a management forecast, even when analysts' forecasts are issued prior to the management forecast. This empirical observation raises the following question: how does the anticipation of a management forecast influence the properties of analyst forecasts that are issued before the management forecast?…”