| I examine analyst forecast errors using restated earnings as the benchmark. While prior research has shown analyst forecasts are only slightly below earnings, suspicion exists that some element of this may be related to analysts following company guidance. If analyst forecast accuracy occurs because of analysts' reliance on management guidance, then this superiority should diminish when using earnings that are clearer of earnings manipulation, i.e. final earnings. Final earnings are restated earnings for restatement firms, and reported earnings for non-restatement firms. In addition, if forecast errors and earnings surprises are merely the results of game playing between analysts and managers, then the appropriateness of using such benchmarks is subject to doubt.; The results of this study can be summarized as the following. Managers manipulate IBES actuals upwards from GAAP earnings for restatement firms, but not for non-restatement firms. For restatement firms, the forecast error and forecast bias of affiliated analysts are significantly greater than those of unaffiliated analysts when using IBES actuals as the benchmark, but not when using final earnings as the benchmark. This implies that both affiliated and unaffiliated analyst forecasts are closer to IBES actuals than to final earnings. Since the IBES actuals that analyst forecasts are closer to have been significantly misguided, therefore, analyst forecasts are also significantly misguided for restatement firms. That is, both affiliated and unaffiliated analysts of restatement firms are unable to explicitly warn investors about the existence of earnings manipulation.; For non-restatement firms, there is no difference between the forecast error and forecast bias of affiliated and those of unaffiliated analysts. Hence, for the majority of firms, there doesn't need to be concern regarding the forecasts of analysts who are affiliated with covered firms due to underwriting relationships. Affiliated analysts of restatement firms issue forecasts that are above IBES actuals. However, the cause of this is unknown.; This study provides the following indicators of possible GAAP earnings and street earnings manipulation. (1) Firms with IBES actuals that are significantly different from GAAP earnings. (2) Firms that have consecutive positive earnings surprises. (3) Companies whose analysts provide overly optimistic forecasts. (4) Companies that have misstated their earnings in prior period(s). |
