Forecasting Shares Outstanding

We document that a significant proportion of the tendency for firms to beat expectations arises because of shares outstanding forecasts. Firms are ten percent more likely to meet or beat analysts’ EPS forecasts than their unscaled earnings forecasts. We infer analyst share forecasts by dividing earnings forecasts by EPS forecasts and provide evidence of catering, as share forecast errors are consistent with managerial reporting preferences both in the cross-section and inter-temporally. Furthermore, analysts incorporate predictable variation in shares outstanding (i.e., repurchases and dilution from outstanding conversion options) with bias, which makes firms more likely to meet or beat. Overall, our findings suggest analysts cater to managerial reporting preferences through their modeling of shares outstanding, creating financial reporting incentives to engage in transactions, such as repurchasing shares, that facilitate such catering