We hypothesize and document that analysts show an unusually high propensity for an OPDFR when issuing a negative EFR. In the field study, our interviews with sell-side analysts provide corroborating evidence consistent with the posited conflicting analyst incentives that motivate our hypothesis. Our hypothesis that analysts provide a CFFR selectively, depending on the sign of an EFR, is also consistent with a theoretical model of Hughes and Pae (2004), which explains managers’ voluntary disclosure choices when publicizing private information. They predict that managers supplement good (i.e., positive) and bad (i.e., negative) earnings news differentially with other value-relevant disclosures. In our research setting, the supplemental value-relevant information is the cash flow forecast. That is, an analyst who discloses a negative EFR (i.e., ‘bad primary news’ in the model’s terms) has an incentive to avoid negative consequences by negating or downplaying the bad news. Analysts negate bad news by reducing confidence in that news. They reduce confidence by providing a positive CFFR (i.e., supplemental disclosure) that influences the interpretation of the primary bad news disclosed in the negative EFR.
The complementary and corroborating nature of this research should reinforce our conclusions and motivate future research in this area. Such research could include examining the relative size of forecast revisions (i.e., CFFR vs. EFR) that are used to moderate or reinforce the direction of the news in the EFR. Given that we have documented that analysts strategically employ CFFRs and EFRs that are opposite to each other, this seems to be a logical extension of our research. Further, our field research on analysts’ forecasting activities does not directly address the political and social aspects of analysts in capital markets (e.g., Roberts, Sanderson, Barker, & Hendry, 2006). Future research may expand this field study by interviewing corporate managers, salespersons of brokerages, investors, and analysts of the covered firms to provide more insights. It may also extend the archival study by examining other ways for strategic analysts to keep managers happy when issuing negative earnings forecasts, such as favorable long-term earnings forecasts or stock recommendations (e.g., Dechow, Hutton, & Sloan, 2000; Lin & McNichols, 1998).
