This paper corroborates the finding of prior studies that managers avoid reporting earnings lower than analyst forecasts (i.e., negative earnings surprises) and provides new evidence of actions contributing to this phenomenon. Specifically, we provide empirical evidence of both (1) upward management of reported earnings and (2) downward 'management' of analysts' forecasts to achieve zero and small positive earnings surprises. Further analysis of the components of earnings management suggests that both the operating cash flow and discretionary accruals components of earnings are managed. Copyright 2006 The Authors Journal compilation (c) 2006 Blackwell Publishing Ltd.

This paper explores whether analyst forecasts impound the earnings management to avoid losses and small earnings decreases documented in Burgstahler and Dichev 1997, whether analysts are able to identify which specific firms engage in such earnings management, and the implications for significant forecast error anomalies at zero earnings and zero forecast earnings. We use data from Zacks Investment Research 1999 and find that analysts anticipate earnings management to avoid small losses and small earnings decreases. Further, analysts are much more likely to forecast zero earnings than firms are to realize zero earnings, and analysts are unable to consistently identify the specific firms that engage in earnings management to avoid small losses. This latter inability contributes to significant forecast pessimism associated with zero reported earnings and significant forecast optimism associated with zero earnings forecasts. CondenséLes auteurs cherchent à déterminer si les prévisions des analystes tiennent compte des comportements de gestion des résultats, visant à éviter les pertes annuelles et les décroissances du bénéfice, décrites par Burgstahler et Dichev (1997). Ces derniers rapportent, en effet, l'existence de comportements de gestion des résultats en ce qui a trait au bénéfice net, une mesure qui englobe les conséquences de l'abandon d'activités, des éléments extraordinaires et des éléments exceptionnels. Les travaux de Degeorge et al. (1999) confirment également l'existence de comportements de gestion des résultats en ce qui a trait au bénéfice avant éléments extraordinaires. Les bases de données prévisionnelles diffèrent quant à la mesure du bénéfice prévu et du bénéfice réalisé, mais elles font généralement état du bénéfice d'exploitation avant éléments extraordinaires et non récurrents et tentent toujours d'exprimer le bénéfice prévu et le bénéfice réalisé en s'appuyant sur une définition homogène du bénéfice. Les valeurs du bénéfice déclaré et du bénéfice prévu fournies par Zacks et utilisées dans la présente étude excluent systématiquement les éléments extraordinaires, non récurrents et exceptionnels. Les auteurs se demandent d'abord si les comportements de gestion des résultats visant à éviter les pertes et les décroissances du bénéfice sont manifestes dans cette mesure particulière des résultats et, ensuite, si les analystes anticipent ces comportements de gestion des résultats dans leurs prévisions. Les auteurs tirent de la base de données de Zacks Investment Research les valeurs du bénéfice par action (BPA) annuel réel et prévu des années 1986 à 1996. Pour obtenir le bénéfice annuel estimé et réalisé, ils multiplient ces valeurs du BPA par le nombre d'actions ordinaires ayant servi au calcul du BPA. Compte tenu du fait que leurs données regroupent un vaste éventail de sociétés d'envergure différente, ils pondèrent toutes les valeurs du bénéfice en fonction de la valeur de marché au début de l'année, comme le font Burgstahler et Dichev. Ils analysent les prévisions émises pour chacun des quatre h...

This study examines analyst forecast errors within the context of stock recommendations. We predict positive forecast error (i.e., optimism) for buy recommendations and negative forecast error (i.e., pessimism) for sell recommendations. We offer two explanations for this prediction: (1) the unconscious tendency to process information in a manner that supports one’s goal, which we refer to as the “objectivity illusion” hypothesis, and (2) the economic incentive to boost trade, which we refer to as the “trade boosting” hypothesis. The pattern of analyst forecast bias we predict (i.e., optimism for buys and pessimism for sells) is opposite in direction to that predicted by the management relations hypothesis—a commonly cited hypothesis for analyst forecast bias. We find broker‐analyst earnings forecast errors are significantly optimistic for buy recommendations and significantly pessimistic for sell recommendations, consistent with the objectivity illusion and trade boosting hypotheses. Our study indicates that the pattern of results reported in prior research (i.e., increasingly optimistic earnings forecasts as the stock recommendation becomes less favorable) is likely driven by a correlated omitted variable, actual earnings. Results of an analysis to distinguish between trade boosting and objectivity illusion appear more consistent with the objectivity illusion.

Das et al. (1998) suggest that as earnings become less predictable, analysts issue increasingly optimistic forecasts to please managers and consequently gain, or at least limit the loss of, access to managers' private information. We reexamine the association between earnings forecast error and earnings predictability because there is evidence suggesting that deliberate earnings forecast optimism is not an effective mechanism for gaining access to managers' information (e.g., Eames et al. 2002; Matsumoto 2002). We document associations between earnings level and both forecast error and earnings predictability. These associations suggest that earnings level may be an important control variable when examining the association between forecast error and earnings predictability. When we control for the level of earnings we find no significant association between forecast error and earnings predictability. Thus, we find no evidence that analysts intentionally issue optimistically biased earnings forecasts.