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 managements 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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Contemporary Accounting Research
Rotterdam School of Management (RSM), Erasmus University

Tan, H.-T, Libby, P, & Hunton, J.E. (2010). When do analysts adjust for biases in management guidance? Effects of guidance track record and analysts' incentives. Contemporary Accounting Research, 27(1), 187–208. doi:10.1111/j.1911-3846.2010.01006.x