Analyst information acquisition and the relative informativeness of analyst forecasts and managed earnings

Stefan F. Schantl

Accounting and Business Research, 2018, vol. 48, issue 1, 62-76

Abstract: Mixed empirical evidence exists on whether equity analyst forecasts complement (‘interpretation role’) or rather substitute for (‘information role’) the informativeness of corporate earnings. This paper develops a theoretical model in which an analyst acquires costly information to forecast the fundamental information contained in a subsequently released and strategically manipulated earnings announcement. The manager is assumed to manipulate earnings such that his objectives – an uncertain price interest and meeting-or-beating the analyst forecast incentives – are optimized. The model shows that the manager’s incentives are the source of the two roles of the analyst information in the valuation of earnings. In a theoretical regression of share price on earnings and the analyst forecast, it can be shown that a positive forecast response coefficient, and thus the dominance of the information role of analyst forecasts, is only obtained if the analyst’s information acquisition costs are sufficiently low.

Date: 2018
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DOI: 10.1080/00014788.2016.1204215

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