Trading incentives to meet the analyst forecast

Sarah McVay, Venky Nagar, Vicki Wei Tang

Review of Accounting Studies · 2006 · Volume 11 · Issue 4

Abstract

We examine stock sales as a managerial incentive to help explain the discontinuity around the analyst forecast benchmark. We find that the likelihood of just meeting versus just missing the analyst forecast is strongly associated with subsequent managerial stock sales. Moreover, we provide evidence that managers manage earnings prior to just meeting the threshold and selling their shares. Finally, the relation between just meeting and subsequently selling shares does not hold for non-manager insiders, who arguably cannot affect the earnings outcome, and is weaker in the presence of an independent board, suggesting that good corporate governance mitigates this strategic behavior.

Keywords

Analyst forecasts, Earnings, Managerial compensation, Insider trading, Corporate governance

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