Between the Lines: Investor Responses to Analyst Bias, Firm Guidance, and Credibility Cues

Abstract

While earnings surprises in relation to analyst forecasts are well studied, less is known about how investors react when a firm’s own earnings guidance proves inaccurate. This thesis addresses this by investigating whether the source of a forecast error, firm issued guidance versus analyst consensus, differentially influences investor reactions. Using a sample of annual earnings announcements from publicly listed companies between 2010 and 2019, the study employs an event study methodology to capture short term abnormal stock price reactions to earnings surprises. Panel regression analysis is used to examine patterns in stock price volatility related to persistent guidance behaviors, such as underpromising or overpromising over multiple event windows. Short term price reactions are significantly stronger when analyst forecasts turn out to be wrong compared to the actual EPS, in relation to similar errors in firm guidance. Firms that Underpromise & Beat their own guidance experience increased stock price volatility, which suggest that repeated forecast failures erode management’s credibility. This is reinforced by the extended event windows showing increasing differentiation between guidance behaviors over time. Although the models lack statistical significance, the directional consistency of results aligns with signaling and disclosure theory, suggesting that trust and transparency influence investor responses more than the immediate reaction window. This thesis contributes to finance literature by showing that analyst forecasts have a stronger impact in the short term but also the effects of guidance credibility.