Whisper forecasts and earnings management

This paper examines the recent market phenomenon of whisper forecasts of earnings and whether their appearance affected investors, managers and market behavior. We explore the relation between official earnings per share analysts' forecasts, realized earnings, and whisper forecasts. We find that the mean analysts' forecast error for a sample of growth firms has increased over time and shows a pessimistic bias. When whisper forecasts are used as earnings estimates, no bias is evident and the mean whisper error is significantly lower than the mean analysts' forecast error. The unexpected component of earnings better explains abnormal returns around the earnings announcement date when whisper forecasts are used as earnings expectations instead of analysts' forecasts. In view of recent evidence, that managers manipulate earnings to meet or just beat earnings thresholds, we test whether managers regard whisper forecasts as a relevant threshold to meet or beat. We find that firms that were able to meet or just beat the whisper forecast reported higher abnormal accruals when compared with a cross-section of firms in the same industry. This finding is consistent with the hypothesis that whisper forecasts were not only a more accurate predictor of earnings, but also a market relevant threshold that provoked accrual manipulation by managers to reach aggressive unofficial estimates.