The nexus between CEO incentives and analysts' earnings forecasts

Emmanuel Mamatzakis and Anna Bagntasarian

International Journal of Finance & Economics, 2021, vol. 26, issue 4, 6205-6248

Abstract: In this paper, we examine the nexus between analysts' forecasts and CEO incentives over different forecasting horizons. We assemble a unique analyst‐level sample for US firms covering the period between 1992 and 2015 from three different databases that provide information for CEO incentives and analysts' characteristics. Panel regression results reveal significant effect of CEO incentives and analysts' characteristics on the forecast accuracy of the latter. The reported results suggest that CEO incentives driven by high compensation, restricted stock holdings and stock ownership can correct analysts' optimism, whereas CEO bonus and sensitivity to changes in firm's value exacerbate analysts' optimism. We further examine how CEO incentives affect the impact of earnings management on analysts' forecasts. Results show that CEO incentives can augment the effect of earnings management on analysts' forecasts with CEO bonus being the most deteriorating factor. Our findings also indicate that experienced analysts are more optimistic in their forecasts, while higher forecast frequency can correct this optimism. We further show whether regulations affect forecasts.

Date: 2021
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