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Using firm-level earnings forecasts and managerial guidance data, we construct guidance surprises for analysts, i.e., differences between managerial guidance and analysts' initial forecasts. We document new evidence on expectation formation: (i) analysts overreact to managerial guidance and the overreaction is state-dependent, i.e., it is stronger for negative guidance surprises but weaker for surprises that are larger in size; and (ii) forecast revisions are neither symmetric in guidance surprises nor monotonic. We organize these facts with a model where analysts are uncertain about the quality of managerial guidance. We show that a reasonable degree of ambiguity aversion is necessary to account for the documented heterogeneous overreaction pattern.

The prior literature on analyst forecasts has focused almost exclusively on firms that just meet or beat the mean or median consensus analyst forecast, without much regard to alternative benchmarks within the forecast distribution. Anecdotal evidence suggests that there is institutional significance to the lowest (minimum) and highest (maximum) analyst earnings forecast. We rigorously explore whether these two new benchmarks actually have incremental significance and, if so, whether there are differences in how managers and investors perceive the importance of these three benchmarks (i.e., minimum, mean, and maximum). Consistent with the theory of investor ambiguity aversion, which predicts an asymmetric market response to good and bad news, our results support the notion that of the three benchmarks we explore, firms act most aggressively to exceed the minimum forecast, followed by the mean, and then finally the maximum. This order is consistently supported by the following evidence: the existence of higher incentives to beat the benchmark; the likelihood of earnings management to beat the benchmark; accrual reversal after firms just barely achieve each benchmark; accrual mispricing around each benchmark; and, finally, a faster incorporation into the stock price of the bad news that a firm misses the minimum than of the good news that a firm meets or beats the maximum. These findings fill a void in academic research on these two new benchmarks and offer a consistent explanation as to why the popular press and managers frequently highlight and discuss beating these benchmarks as a separate and notable achievement.

Using brokerage mergers and closures as natural experiments, we examine how exogenous changes in the information environment affect a firm’s financing choice. Our difference-in-differences approach shows that exogenous increases in information asymmetry lead firms to substitute away from equity and public debt toward bank debt. Firms with higher risk tend to substitute equity for bank debt, and firms with lower risk tend to substitute bonds for bank debt. The effect of the change in the information environment on a firm’s financing choice is more pronounced for firms with worse information environments, such as those with few initial analysts and younger firms. We demonstrate that the mechanism of the change is through a reduction of the issuance of equity and bonds but with an increase of the issuance of bank loans. Further analysis reveals that such firms tend to reduce long-term borrowing, reduce their issuance of subordinated debt, and increase their revolving credit lines.