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When Do Analysts Adjust for Biases in Management Guidance? Effects of Guidance Track Record and Analysts’ Incentives

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  • HUN†TONG TAN
  • ROBERT LIBBY
  • JAMES E. HUNTON

Abstract

Prior research indicates that analysts do not fully adjust for the general downward bias in earnings guidance issued by management. We report the results of two experiments designed to investigate how guidance track record and analysts’ incentives jointly explain the extent to which analysts adjust for guidance bias. Our results suggest that analysts with accuracy incentives adjust for management’s track record of downwardly biased guidance when the bias is relatively small (one cent), but those with relationship incentives do not. Furthermore, the difference in adjustment is larger when the bias track record is inconsistent than when it is consistent. Also, when guidance bias is larger (two cents) relative to smaller (one cent), analysts with relationship incentives partially adjust, as they appear to strike a balance between accuracy and their desire to please management. These findings hold implications for investors, regulators, and the interpretation of prior research.

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  • Hun†Tong Tan & Robert Libby & James E. Hunton, 2010. "When Do Analysts Adjust for Biases in Management Guidance? Effects of Guidance Track Record and Analysts’ Incentives," Contemporary Accounting Research, John Wiley & Sons, vol. 27(1), pages 5-5, March.
    • Handle: RePEc:wly:coacre:v:27:y:2010:i:1:p:5-5
    DOI: 10.1111/j.1911-3846.2010.01010_5.x
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    Cited by:

    1. Jun Han & Hun‐Tong Tan, 2010. "Investors' Reactions to Management Earnings Guidance: The Joint Effect of Investment Position, News Valence, and Guidance Form," Journal of Accounting Research, Wiley Blackwell, vol. 48(1), pages 81-104, March.
    2. SUZUKI, Tomohiro & TAKASU, Yusuke, 2013. "Does Management Forecast Drive Growth of the Firm?," Working Paper Series 172, Center for Japanese Business Studies (HJBS), Graduate School of Commerce and Management Hitotsubashi University.
    3. Elaine Ying Wang & Hun‐Tong Tan, 2013. "The Effects of Guidance Frequency and Guidance Goal on Managerial Decisions," Journal of Accounting Research, Wiley Blackwell, vol. 51(3), pages 673-700, June.
    4. Han, Jun, 2013. "A literature synthesis of experimental studies on management earnings guidance," Journal of Accounting Literature, Elsevier, vol. 31(1), pages 49-70.
    5. Zhou, Bole & Ma, Lili & Yang, Shenghao, 2024. "Catering behaviors in corporate digitization disclosures: Identification and analyst forecast accuracy loss," Research in International Business and Finance, Elsevier, vol. 68(C).
    6. Lisa Koonce & Marlys Gascho Lipe, 2010. "Earnings Trend and Performance Relative to Benchmarks: How Consistency Influences Their Joint Use," Journal of Accounting Research, Wiley Blackwell, vol. 48(4), pages 859-884, September.
    7. Meckfessel, Michele & Moehrle, Stephen, 2017. "Self-regulation of the academic accounting literature: The case of James Hunton," Research in Accounting Regulation, Elsevier, vol. 29(1), pages 10-18.

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