Do Managers use Meeting an Analyst Forecast to Signal Private Information?

• Main Authors: Fedyk, Tatiana, Gunny, Katherine, ZHANG, Tracey Chunqi
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2009
• Subjects: Signaling; Analyst Forecasts; Earnings; Patents; Research and Development; Information Asymmetry; Accounting; Corporate Finance; Technology and Innovation
• Online Access: https://ink.library.smu.edu.sg/soa_research/9
• Institution: Singapore Management University

This paper investigates whether managers meet analyst forecasts to signal private information about the underlying value of one specific type of asset – patents. Prior research shows thereare a disproportionate number of firms that just meet analyst forecasts and there is compelling evidence of the use of accrual management and real activities manipulation around this threshold. Bartov et al. (2002) find that firms use earnings management to meet or beat analyst forecasts and these firms have higher future performance than firms that missed. Managers may use earnings management around this threshold for opportunistic reasons and/or to signal future firm value. We focus on a sample of firms in patent rich industries for which the signaling motivation is stronger because it is difficult for managers to credibly communicate the value of their patents. We use a unique database from NBER to construct a proxy for the manager’s private information about the underlying value of the firm’s patents. We show that firms that just meet the analyst forecast have more valuable patents, engage in more earnings management and have superior future firm performance compared to firms that just miss the analyst forecast. Overall, we find support for the hypothesis that our sample of firms uses meeting analyst forecasts to signal favorable private information.