Guidance Estimates Effect on Analysts

Abstract

This study examines whether guidance estimates on a larger number and specific parameters increases the accuracy and dispersion of analyst estimates. The study shows that estimates on a larger number of parameters are becoming increasingly widespread which increases the relevance of this paper. The companies’ choice of the parameters is affected by the difficulty in providing accurate estimates and the performance of the company. Furthermore, the demand from analysts, institutional investors and debt issuers also has an impact on the company’s choice of parameters with guidance estimates. The study shows that guidance estimates create value for analysts providing estimates on the same parameter. Furthermore, the number of parameters with guidance estimates are positively correlated with higher accuracy and lower dispersion in analyst estimates. This effect is diminished if the analysts have a guidance estimate on the parameter they estimate. Analysts can effectively use the information provided by guidance estimates on a higher number of parameters, but the analyst can derive the same information from an estimate on the same parameter. The value from guidance estimates is not correlated with the distance between guidance- and analyst estimate. Some guidance estimates only create value on the same parameter analysts estimate whereas other parameters create value on a range of different parameters. Therefore, there is a difference in the information analysts can extract from the specific guidance estimates. The paper finds that analysts are still able to extract relevant information from guidance estimates on insignificant parameters when measured on number of parameters instead of the specific parameters. Overall, the paper finds that the choice and number of parameters with guidance estimates influences the accuracy and dispersion of analysts’ estimates. Analysts can derive information from guidance estimates on the same and a larger number of parameters. Guidance estimates on specific parameters also increases the analyst estimates on several other parameters. Therefore, the choice and number of parameters with guidance estimates affects the asymmetrical information and the informational basis for the analysts’ estimates.