Revenue Forecasts as a Mechanism for Analyst Reputation Development

Previous studies have demonstrated that analysts' concern for their reputations and career advancement can partially explain the level of forecast error and systematic biases in their forecasts. This paper extends the literature by demonstrating that the decision to distribute revenue forecasts is motivated by the desire to enhance reputation. On average, analysts who distribute revenue forecasts have less experience and work for smaller, less prestigious brokerage houses, which prompts them to use revenue forecasts as a means of enhancing their own visibility within the industry. These same analysts also set relatively low earnings and revenue targets in an effort to cultivate their relationship with management and gain access to soft information. For individual analysts, the magnitude of the downward bias diminishes as experience and reputation increase, and ultimately disappears when they cease distributing revenue forecasts