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Can you Believe it? Managerial Discretion and Financial Analysts’ Responses to Management Earnings Forecasts

Finance and Strategy

ISBN: 978-1-78350-493-0, eISBN: 978-1-78350-494-7

ISSN: 0742-3322

Publication date: 19 September 2014


Financial analysts act as crucial conduits of information between firms and stakeholders. However, comparatively little is known about how these information intermediaries evaluate the believability and importance of corporate disclosures. We argue that a firm’s level of managerial discretion, or latitude of executive action, acts as a cue for financial analysts, which helps them interpret and respond to voluntary management earnings forecasts. Our study provides strong, robust evidence that financial analysts find management forecasts significantly less believable in low-discretion than in high-discretion environments, and therefore tend to be much less responsive to these forecasts. We also show that managerial discretion is especially impactful on analysts’ responses in those circumstances where analysts are typically most uncertain about how to interpret management forecasts.




Authors are in alphabetical order and contributed equally. We thank Ethan Burris, Don Hambrick, Mike Pfarrer, Margarethe Wiersema, and participants in the INSEAD research seminar for their helpful comments on earlier drafts of this manuscript. We are also very grateful to Editor Belen Villalonga and two anonymous reviewers for their detailed advice and suggestions. This research was funded in part by the INSEAD Alumni Fund and a 3M Nontenured Faculty Grant at the University of Texas at Austin.


Chen, G. and Crossland, C. (2014), "Can you Believe it? Managerial Discretion and Financial Analysts’ Responses to Management Earnings Forecasts", Finance and Strategy (Advances in Strategic Management, Vol. 31), Emerald Group Publishing Limited, Bingley, pp. 103-143.



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