Managerial Guidance and Analysts' Underreaction

Empirical investigations of analysts forecast surveys concerning earnings realizations find significant time varying biases usually attributed to the analysts liability to cognitive limitations. For example, a positive autocorrelation of analysts forecast errors is commonly explained by analysts underreaction. In this paper we dvelop a random dynamical system describing the evolution of analysts forecasts and firms prices and show that managerial guidance is capable to explain such inefficiencies in the analysts forecasting behavior. This result is well supported by empirical tests. In particular, we find that the managers of growth firms guidestronger than the managers of value firms, which allows further conclusions on the precision and efficiency of earnings forecasts released for value and growth stocks in line with the literature.