Analyst Coverage and the Likelihood of Meeting or Beating Analyst Earnings

Forecasts*
SHAWN X. HUANG, Arizona State University
RAYNOLDE PEREIRA, University of Missouri-Columbia
CHANGJIANG WANG, University of Cincinnati

*Accepted by Editor Sudipta Basu. We thank two anonymous reviewers and

Sudipta Basu (editor) for their suggestions. We also thank Dan Dhaliwal, Inder
Khurana, Kyonghee Kim, Sukesh Patro, Clark Wheatley, Eliza Zhang, and
workshop participants at the University of Missouri for their helpful comments.

Electronic copy available at: https://ssrn.com/abstract=2915165

Abstract: This paper examines the relation between analyst coverage and whether
firms meet or beat analyst earnings forecasts. We distinguish between whether a
firms reported quarterly earnings meet (i.e., equal or exceed by one cent) or beat
(i.e., exceed by more than one cent) its consensus analyst earnings forecasts. We
find a positive relation between analyst coverage and whether a firm meets or beats
analyst forecasts. However, the more pronounced relation is that between analyst
coverage and meeting analyst forecasts. Also, when we consider exogenous shocks
to analyst coverage due to brokerage mergers or closures and conglomerate
spinoffs, we continue to find a robust positive relation only between analyst
coverage and meeting analyst forecasts. To shed light on the causal relation
involved, we examine and find that greater analyst coverage is associated with a
significantly larger market reaction to negative earnings surprises. We also
document that firms with greater analyst coverage are more likely to guide analyst
earnings forecasts downwards. Taken together, our evidence suggests that greater
analyst coverage raises the pressure on managers to meet analyst earnings forecasts.

Keywords: Forecast Bias, Forecast Guidance, Earnings Benchmarks, Analyst

Coverage

JEL classifications: G24

Electronic copy available at: https://ssrn.com/abstract=2915165

1. Introduction

This paper examines the relation between analyst coverage and whether a firm meets (by

zero or one cent) or beats (by more than one cent) its analyst earnings forecasts.1 The inquiry is

motivated by the differing views of this relation. Yu (2008) argues that analysts are effective

external monitors and that greater analyst coverage entails more intense monitoring. This

monitoring view suggests that greater analyst coverage will constrain managerial ability to

manipulate earnings to meet or beat analysts earnings forecasts. In contrast to the monitoring

view, the competition view asserts that greater analyst coverage heightens the intensity of

competition among analysts, which in turn reduces the optimistic bias in analysts forecasts (Hong

and Kacperczyk 2010), making analyst forecasts easier to meet or beat. A more recent view is that

greater analyst coverage has a dark side in that it amplifies the adverse consequences, such as

negative market reaction, to a firms failure to meet analyst earnings expectations, immensely

harming managers wealth, career, and external reputation (He and Tian 2013). These potentially

large negative effects create pressure on managers to meet the short-term performance targets that

analysts set. We empirically evaluate the validity of these three views.

We gather data from the I/B/E/S, Compustat, CDA/Spectrum Institutional 13(f) filings,

CRSP, and First Call databases. Our sample consists of 52,537 firm-quarter observations from

1996 through 2011. We find that greater analyst coverage increases the likelihood that a firm meets

(MEET) or beats (BEAT) its consensus analyst earnings forecasts, after controlling for a number

of previously identified determinants of benchmark beating behavior. At this juncture, our

evidence rules out the monitoring view. We then differentiate the pressure view from the

1
Empirically, a firm meets its analyst earnings forecast when the reported quarterly earnings equals the latest
consensus analyst forecast for that quarter or exceeds it by a cent. A firm beats its analyst earnings forecast if its
reported quarterly earnings exceeds the aforementioned forecast by more than a cent.
1
competition view based on the extent to which a firm meets or beats analyst expectations. The

pressure view implies that increased analyst coverage raises the pressure on managers to meet

analyst forecasts. The competition view, however, is silent on the extent to which competition

among analysts decreases the optimistic bias in analyst forecasts. That is, if the competition view

best describes the effect of analyst coverage, we should not expect the effect of analyst coverage

on the likelihood of MEET to be significantly different from its impact on the likelihood of BEAT.

We find the effect of analyst coverage on the likelihood of MEET is significantly greater than its

impact on the likelihood of BEAT, which provides supporting evidence for the pressure view.

It is possible that the relation between analyst coverage and the likelihood of

meeting/beating analyst expectation is endogenously determined. As such, we conduct additional

analyses to evaluate the robustness of our findings and to further distinguish between the

competition and pressure views. First, we re-estimate our earlier model using a change model

specification and find that an increase in analyst coverage is associated with an increased

probability of MEET, but with a decreased probability of BEAT. Second, we explore the effects of

negative exogenous shocks to a firms analyst coverage due to brokerage house mergers or

closures. Brokerage house mergers reduce analyst coverage by eliminating coverage duplication

(Hong and Kacperczyk 2010), while brokerage house closures reduce analyst coverage by

eliminating analyst positions (Kelly and Ljungqvist 2012). Using a difference-in-differences

approach, we find a reduction in analyst coverage is associated with a decline in the likelihood of

MEET, but it is not associated with the likelihood of BEAT. Third, we explore positive exogenous

shocks to analyst coverage following corporate spinoffs (Gilson, Healy, Noe, and Palepu 2001).

We document that for firms with increased analyst coverage due to spinoffs, there is an increased

2
likelihood of MEET but no significant change in the likelihood of BEAT following spinoffs relative

to control firms. Together, the evidence provides additional support for the pressure view.

To provide further insight into the pressure view, we investigate the impact of analyst

coverage on the market reaction to earnings surprises. We find that analyst coverage amplifies the

three-day market reaction to earnings surprises and this impact is more acute for firms with

negative earnings surprises. This evidence supports the pressure view in that greater analyst

coverage elicits a bigger price reaction to negative firm-specific news as it provides quicker

processing and wider dissemination of information (e.g., Hong, Lim, and Stein 2000). Given this

amplified adverse consequence to not meeting analyst earnings forecasts, we examine whether

greater analyst coverage induces managers to resort to downward earnings guidance to meet

analysts forecasts. We find the association between analyst coverage and the use of downward

earnings guidance is positive and more pronounced for firms that meet analyst earnings forecasts.

These findings again support the pressure view.

Our study contributes to research examining the effects of analyst coverage by showing

that greater analyst coverage imposes pressure on managers to meet short-term performance

benchmarks such as analyst earnings forecasts.2 We also contribute to the literature on earnings

benchmarks by identifying and clarifying the manner in which analyst coverage impacts whether

a firm meets or beats analyst earnings forecasts.

2
Gu and Wu (2003) find for the sample period 198398, a negative relation between analyst coverage and forecast
error (actual earnings forecasted earnings), indicating greater analyst coverage lowers the likelihood of meeting or
beating analyst forecasts. Our study differs from Gu and Wu (2003) in two ways: 1) using more recent data, we find
an opposite relation; 2) Gu and Wu (2003) do not differentiate the extent of forecast error (MEET and BEAT), as we
do in this paper. There are several reasons for this change in relation. First, Brown and Caylor (2005) find managers
increasingly view analyst earnings forecasts as an important earnings threshold to meet or beat. Second, the enactment
of Internal Revenue Code 162 (m) in 1993 has led to an increase in the use of performance based compensation such
as stock options (Perry and Zenner 2001; Core, Guay, and Verrecchia 2003; Balsam and Ryan 2008), hence increasing
managerial incentives to meet or beat analyst forecasts.
3
 The remainder of the paper is organized as follows. Section 2 discusses the related literature

and develops the testable hypotheses. Section 3 describes the sample, variable construction, and

the empirical model. Section 4 reports and discusses the results, and section 5 concludes the paper.

2. Related literature and hypotheses development

There are significant adverse consequences when a firms reported earnings fall short of

analyst earnings forecasts. 3 Hence, it is not surprising that managers view analyst earnings

forecasts as an important earnings benchmark to meet or beat (Graham, Harvey, and Rajgopal

2005). Our study examines whether analyst coverage impacts a firms likelihood to meet or beat

this earnings benchmark. One view of analyst coverage is that analysts are equipped to play a

monitoring role, since they have both financial training and institutional knowledge of the industry

that they cover (Jensen and Meckling 1976). Yu (2008) provides evidence that financial analysts

are able to constrain opportunistic earnings management. Given prior findings that firms use

earnings management to meet analysts consensus forecasts, the constraints on earnings

management imposed by greater analyst coverage should reduce the ability of managers to meet

these forecasts. While the monitoring view is intuitively appealing, extant literature offers several

counterpoints to Yus (2008) argument. For example, Dyck, Morse, and Zingales (2010) suggest

that analysts monitoring incentives may be compromised due to investment banking relationship

between the subject firm and the analysts investment house. Furthermore, Brown, Call, Clement,

3
The adverse effects include negative stock price effects (Skinner and Sloan 2002), reduced management credibility,
a higher likelihood of litigation (Bartov, Givoly, and Hayn 2002), lower cash bonuses for the Chief Executive Officer
(Matsunaga and Park 2001), and a higher probability of forced management turnover (Mergenthaler, Rajgopal, and
Srinivasan 2012). Skinner and Sloan (2002) find that the negative effects of failing to meet analyst earnings forecasts
are asymmetrically higher than the benefits of meeting analyst earnings forecasts. Similarly, Kasznik and McNichols
(2002) find that market valuations are higher for firms that meet or beat analyst forecasts. Lopez and Rees (2002) and
Jiang (2008) find respectively that meeting or beating analyst forecasts is associated with higher earnings response
coefficients and a lower cost of debt.
4
and Sharps (2015) survey finds that analysts consider their primary role as processing and

disseminating firm information rather than monitoring managers.

Unlike the aforementioned monitoring view, Hong and Kacperczyk (2010) argue that

greater analyst coverage enhances the competition among analysts. The competition view takes as

its starting point that an optimistic bias is embedded in analyst forecasts.4 Hong and Kacperczyk

(2010) provide several arguments as to why greater competition can lower this bias. First, a larger

number of analysts increase the diversity of incentives involved in making earnings forecasts, thus

increasing the likelihood that an independent analyst will not bias her/his forecast but will instead

aim for forecast accuracy.5 Second, greater analyst coverage lowers the likelihood of an analyst

being captured by the firm the analyst is following. The argument here is twofold. A larger

analyst following not only makes it difficult and costly for firms to suppress bad news, but also

increases the benefit for an analyst who defects from a tacit collusion among the analysts, since

it may generate monopoly profits for her or him (Gentzkow and Shapiro 2008).6 The competition

4
Extant literature provides several reasons for this bias. First, analysts bias their forecasts upward to gain access to
private firm-specific information (Francis and Philbrick 1993; Das, Levine, and Sivaramakrishnan 1998; Lim 2001;
Barber, Lehavy, McNichols, and Trueman 2006). Second, analysts do it to cater to or attract investment banking
clients (Dugar and Nathan 1995; Lin and McNichols 1998; Michaely and Womack 1999; Dechow, Hutton, and Sloan
2000; OBrien, McNichols, and Lin 2005). Finally, analysts may bias their earnings forecasts to induce greater trading
volume, thus generating greater commission revenue for their brokerage firms (Jackson 2005). Unlike positive
earnings reports, negative earnings reports may not generate a high level of trading volume in so far as they relate to
or influence investors that already own the stock or short sellers (Hayes 1998; Irvine 2004; Karamanou 2011).
5
Gu and Xue (2008) document evidence that is to a certain extent consistent with the competition view in that
nonindependent analysts issue more accurate and less biased forecasts in the presence of independent analysts.
6
Lys and Soo (1995) provide an alternative argument as to why analyst coverage and analyst accuracy will be
positively related. They argue that analyst coverage and analyst forecast precision are shaped by supply and demand
factors. An increase in the demand for analyst reports or a decrease in the cost of gathering reports can lead to higher
analyst coverage, which is accompanied with high analyst forecast precision. For example, a positive shock to trading
volume increases the demand for more analyst reports by investors. Higher commission revenue attracts the entry of
new analysts. In response, analysts already in the marketplace will improve the precision of their forecasts to deter
entry. In equilibrium, both analyst coverage and forecast accuracy will jointly increase after an increase in trading
volume. In an untabulated analysis, we evaluate this alternative explanation and find that higher trading volume
attenuates the positive relation between analyst coverage and whether a firm meets analyst earnings forecasts, contrary
to the prediction implied by Lys and Soo (1995). In addition, we find that trading volume has no significant impact
on the relation between analyst coverage and whether firms beat analyst earnings forecasts.
5
view, therefore, predicts a positive relation between analyst coverage and the likelihood of meeting

or beating analyst forecasts. In early research, there was considerable evidence of an optimistic

bias in analysts earnings forecasts (e.g., Fried and Givoly 1982; OBrien 1988; Brown 1993; Das

et al. 1998). However, more recent studies find a switch from analyst optimism to analyst

pessimism for forecasts immediately preceding earnings announcements (Brown 1997; Basu and

Markov 2004). This recent change in trend in short-term analyst forecasts challenges the validity

of the competition view on an a priori basis.

More recent research (e.g., He and Tian 2013) argues that greater analyst coverage has a

dark side in that it can increase pressure on managers to meet short-term performance

benchmarks such as analyst earnings forecasts.7 Specifically, they note that failing to meet analyst

expectations has non-trivial negative consequences for a firms stock price and its managers

wealth and career. Financial analysts can aggravate such negative consequences by quickly

processing and widely disseminating firm-specific bad news (e.g., Hong et al. 2000).8 Separately,

Hirshleifer and Teoh (2003) and Duffie (2010) note that investor reaction to news events can be

muted if investors are inattentive to potential trading opportunities. By synthesizing firm-specific

information and widely circulating it, greater analyst coverage plays the role of increasing investor

attention and thereby increasing the price reaction to firm-specific news (Huang 2013). This

amplified price reaction to negative earnings surprises increases the likelihood that a firms board

7
He and Tians (2013) pressure hypothesis can be tied to the much developed literature on managerial myopia. This
literature notes that myopic managers would sacrifice long-term value to meet short-term targets (Stein 1989), and
that managerial myopia can be exacerbated under certain circumstances. For example, Bushee (1998) shows that
transient institutional investors create pressure on managers to engage in myopic investment behavior (i.e., reducing
R&D investments to meet short-term earnings benchmarks). Similarly, Matsumoto (2002) finds that firms with higher
transient intuitional ownership are more likely to use downward earnings guidance or upward earnings management
to avoid missing analyst forecasts. In our setting, increased analyst coverage induces managerial myopia in that it
imposes pressure on managers to meet short-term earnings targets in the form of analyst forecasts.
8
In a similar vein, Brennan, Jegadeesh, and Swaminathan (1993) posit and find that stock prices adjust more rapidly
to common information for firms with greater analyst coverage than for firms with lower analyst coverage.
6
of directors will penalize its managers through cuts in compensation and forced turnover

(Mergenthaler et al. 2012). Given these potential penalties, greater analyst coverage creates

pressure on managers to avoid missing analyst earnings forecasts. Consistent with this contention,

He and Tian (2013) find firms with greater analyst coverage are less likely to undertake long-term

innovative activities.9

In light of the conflicting views, the relation between analyst coverage and whether a firm

meets or beats its analyst earnings forecasts remains an empirical issue. The monitoring view

predicts a negative relation while the pressure and competition views predict a positive relation.

To the extent that these effects are present and cancel each other out, we may not detect any

empirical relation. Alternatively, if the effects of the competition and pressure views dominate that

of the monitoring view, then increased analyst coverage will be associated with a higher likelihood

of meeting or beating analyst earnings forecasts. As such, we evaluate the following hypothesis

stated in its alternate form:

HYPOTHESIS 1. Analyst coverage increases the likelihood of meeting or beating analyst

earnings forecasts.

Extant research has documented that a disproportionately large number of firms report

earnings that either equal or exceed by one cent their analyst earnings forecasts as compared to the

number of firms that just miss this threshold (Degeorge, Patel and Zeckhauser 1999; Brown 2001;

9
There are some discrepancies in prior research with respect to the relation between analyst coverage and innovation
activities. Barth, Kasznik and McNichols (2001) argue that analysts have greater incentives to follow firms with a
high level of intangible assets since intangible assets increase information asymmetry and following such firms may
generate more sizable trading commissions. Barth et al. (2001) differ from He and Tian (2013) in several ways. First,
Barth et al. (2001) largely focus on observable inputs to innovative activities such as R&D expenditures, which are
likely affected by accounting norms. In contrast, He and Tian (2013) focus on outputs of innovative activities in terms
of the number and citations of patents, which encompass the successful usage of all (both observable and
unobservable) innovation inputs (He and Tian 2013, 859). Further, He and Tian (2013) note that they have better
identification of the effects of analyst coverage since they take advantage of exogenous shocks to analyst coverage
rather than relying on existing levels of analyst coverage.
7
Brown and Caylor 2005). This so-called kink in the distribution, which has been interpreted as

managers acting deliberately to meet analyst forecasts (e.g., Burgstahler and Eames 2006; McVay,

Nagar, and Tang 2006), has an important implication for distinguishing the pressure view from the

competition view. The pressure view implies that increased analyst coverage raises the pressure

on managers to meet analyst forecasts, while the competition view is silent on the extent to which

competition among analysts decreases the optimistic bias in analyst forecasts. In other words, the

competition view implies that analyst coverage will equally increase the likelihood of both MEET

and BEAT. Hence, we differentiate between the pressure and competition views by testing the

following hypothesis:

HYPOTHESIS 2. Analyst coverage increases the likelihood of meeting analyst earnings

forecasts more than it increases the likelihood of beating analyst earnings forecasts.

To clarify, HYPOTHESIS 1 aims to distinguish the monitoring view from both the competition

and pressure views. If the evidence shows that greater analyst coverage decreases the likelihood

of meeting or beating analyst earnings forecasts, it suggests the monitoring view is descriptive of

the dominant impact of analyst coverage. If the evidence shows otherwise, then HYPOTHESIS 2

becomes relevant in that it aims to further determine whether it is the competition view or the

pressure view that is best descriptive of the impact of analyst coverage. If greater analyst coverage

uniformly raises the likelihood of both MEET and BEAT, then the competition view better captures

the impact of analyst coverage than the pressure view. In contrast, if greater analyst coverage raises

the likelihood of MEET but has a smaller impact on the likelihood of BEAT, then the pressure view

is more descriptive of the effects of analyst coverage on whether a firm meets or beats analyst

earnings forecast.10

10
Hypotheses 1 and 2 differ in terms of the benchmarks involved. The benchmark for hypothesis 1 is whether firms
miss analysts earnings forecasts. The objective here is to assess whether analyst coverage reduces (increases) the
8
3. Sample, variable construction, and empirical models

3. 1. Sample

We obtain analysts quarterly earnings forecasts and actual earnings per share data from

the Institutional Brokers Estimate System (I/B/E/S) Unadjusted Detail History file.11 We focus on

the last quarterly forecasts issued by individual analysts and consider only the forecasts issued

within the 60 days preceding the earnings release to avoid stale forecasts.12 The consensus analyst

forecast is derived as the median of this set of earnings forecasts. The financial variables are from

the Compustat quarterly file. We gather management forecasts of quarterly earnings from First

Calls Company-Issued Guidance database and institutional ownership information from

CDA/Spectrum Institutional 13(f) filings. We compute dedicated institutional ownership based on

the institutional investor classification developed by Bushee (1998). We restrict the final sample

to firms with sufficient data to construct the control variables used in our empirical tests. Our

sample period spans 1996 through 2011 as First Call has limited coverage on management earnings

forecasts before 1996.13 The final sample consists of 52,537 firm-quarter observations for 4,151

unique firms. To mitigate the effects of outliers, we winsorize all continuous variables at the 99th

and 1st percentiles. The results are qualitatively similar when we do not winsorize these variables.

3.2. Empirical models

likelihood that a firm misses (meets or beats) its analyst earnings forecast. The benchmark for hypothesis 2 is
whether firms beat analysts forecasts. The objective here is to assess whether the effect of analyst coverage differs
in terms of whether a firm meets or beats its analyst earnings forecast.
11
I/B/E/S has both Unadjusted Detail History and Summary History files. I/B/E/S adjusts forecasts and actual data
for stock splits and rounds them to the nearest cent in the Summary file. This procedure could artificially reduce
forecast errors (Baber and Kang 2002; Diether, Malloy, and Scherbina 2002; Payne and Thomas 2003).
12
We depart from Hong and Kacperczyk (2010) in that we examine quarterly earnings forecasts instead of annual
earnings forecasts. Prior research has found analyst forecast error and optimistic bias increases with the forecast
horizon (e.g., Collins, Hopwood, and McKeown 1984; Basu, Hwang, and Jan 2005).
13
In an untabulated robustness test, we impose an additional requirement that our sample period starts from 1998
(Chuk, Matsumoto and Miller 2013) and restrict the sample management forecasts to those that are not issued within
two days of the earnings announcement date, i.e., we restrict our analysis to strictly unbundled forecasts (Rogers
and Van Buskirk 2013). The tenor of our results remains unchanged.
9
 To empirically evaluate our predictions, we first categorize the sample firms into: (1) firms

with reported quarterly earnings that equal or exceed analyst earnings forecasts by one cent, i.e.,

earnings surprises of 0 or 1 cent (MEET), (2) firms with reported quarterly earnings that exceed

analyst forecasts by more than one cent, i.e., earnings surprises that exceed one cent (BEAT), and

(3) firms that miss analyst earnings forecasts (MISS). Next, we use multinomial logistic regression

analysis to model the effect of analyst coverage on the probability of each of the aforementioned

categories, using the firms that miss analyst earnings forecasts as the reference group. The

multinomial logistic regression model is estimated as follows:

P(MEET,BEAT)= + 1*LOG_COVERAGE + 2*MEG + 3*ABACC + 4*POSUE

+ 5*INDGR + 6*SIZE + 7*RETURN +8*LAG_ROA + 9*EXPECTED_ROA
+ 10*LEVERAGE + 11*BM + 12*ASSETGR + 13 *STDCFO + 14*IDIO_RISK
+ 15*TURNOVER + 16*INST_DED + 17*FORECAST_HORIZON + 18*SP500
+ 19*EXTFIN + (1)
Where
MEET = 1 if the difference between the actual earnings per share and
the consensus analyst forecast of earnings per share is in the
range of [0, 1 cent];
BEAT = 1 if a firms actual earnings exceeds the consensus analyst
forecast by more than 1 cent;
LOG_COVERAGE= The natural logarithm of the number of analysts issuing
forecasts about the firms earnings in a given quarter;
MEG = 1 if the firm provides management earnings guidance for that
quarter, 0 otherwise;
ABACC = Performance adjusted abnormal accruals (signed) calculated
based on Kothari, Leone, and Wasley (2005);
POSUE = 1 if the seasonal change in earnings before extraordinary
items is positive, 0 otherwise;
INDGR = The value-weighted average of annual sales growth in each
two-digit SIC industry calculated over 12 months before the
fiscal quarter end;
SIZE= The natural logarithm of market value of equity;
RETURN= Stock returns during the past 12 months;
LAG_ROA= Return on assets (ROA) in quarter t-1;

10
 EXPECTED_ROA= Expected return on assets in quarter t+1 calculated as
ROAt-3 + b*(ROAt - ROAt-4) (Foster 1977), where b is the
persistence of seasonally differenced quarterly earnings
estimated based on the AR (1) model;
LEVERAGE = The sum of short-term and long-term debt scaled by total
assets;
BM = Book value of equity divided by market value of equity;
ASSETGR = Change in total assets, scaled by lagged total assets;
STDCFO = The standard deviation of cash flows divided by lagged
assets during the past 20 quarters (5 years);
IDIO_RISK = Firm idiosyncratic risk calculated as the natural logarithm of
the variance of monthly abnormal stock returns over the past
12 months based on the market model;
TURNOVER= The mean of monthly trading volume over the number of
outstanding shares during the quarter;
INST_DED = The percentage of common shares owned by dedicated
institutional investors during the fiscal quarter;
FORECAST_HORIZON= The natural logarithm of the average number of days between
the last analyst forecasts and earnings announcement;
SP500= 1 if the firm is included in the S&P 500 index, 0 otherwise;
EXTFIN = The sum of net cash receipts from equity and debt issuance,
scaled by total assets.

Analyst coverage (LOG_COVERAGE) is the variable of interest. We follow Bartov et al.

(2002) and use the provision of management earnings guidance to control for expectations

management. The coefficient on MEG is expected to be positive because managers can use

guidance to lower analyst expectations. Following Kothari et al. (2005), we use performance

adjusted abnormal accruals (ABACC) to proxy for earnings management. The coefficient on

ABACC is expected to be positive since income-increasing earnings management increases the

probability of meeting or beating analyst forecasts.

Prior research also suggests that firms ability to meet or beat analyst earnings forecasts

can be affected by unexpected macroeconomic shocks (OBrien 1988, 1994). Following

Matsumoto (2002), we control for unexpected shocks to earnings at the firm level using POSUE.

The coefficient on POSUE is expected to be positive. Industry growth, INDGR, is used to control

11
for unexpected shocks at the industry level. If industrial production is slowing down, firm earnings

are likely to be negatively affected. OBrien (1994) finds a positive relation between INDGR and

earnings surprises. Therefore, the coefficient on INDGR is expected to be positive.

Prior studies find that the likelihood of meeting or beating consensus analyst earnings

forecasts is associated with firm characteristics such as firm size, stock and accounting

performance, leverage, and growth opportunities. To the extent that analysts have stronger

incentives to issue optimistic forecasts for smaller firms in order to gain access to managers

private information (Lim 2001), we expect the coefficient on SIZE to be positive. Alternatively,

small firms tend to report losses more frequently, thus increasing the difficulty for small firms to

meet or beat analyst expectation (e.g., Hwang, Jan, and Basu 1996). While our measure of

unexpected macroeconomic shocks has a performance component, we explicitly control for firm

performance using stock returns during the past 12 months (RETURN). The coefficient on

RETURN is expected to be positive since higher performing firms are more likely to have the

capacity to meet or beat analyst forecasts. We also control for firms past accounting performance

(LAG_ROA) and expected accounting performance (EXPECTED_ROA), and expect that firms

with high accounting performance are more likely to meet or beat analyst earnings forecasts.

However, firms with high performance in the past may also increase analyst expectations, making

analyst forecasts more difficult to meet or beat. Thus, we do not make a directional prediction on

LAG_ROA. Firms with high leverage may have incentives to manage earnings upward to avoid

covenant violations or lower borrowing costs (Watts and Zimmerman, 1978, 1990). However,

prior studies (Basu, Hwang, and Jan 2001; Ball and Shivakumar 2005) also find that debtholders

create a demand for more conservative financial reporting, which will negatively impact firms

probability to meet or beat analyst expectation. As such, we do not make a directional prediction

12
on the coefficient on LEVERAGE. Growth opportunities are measured using book-to-market ratio

(BM) and asset growth (ASSETGR). Growth firms tend to have more incentives to meet or beat

analyst forecasts, because their stocks exhibit large negative price reaction to negative earnings

surprises (Skinner and Sloan 2002).

Uncertainty in the forecast environment can negatively affect the likelihood of meeting or

beating analyst forecasts. Following prior research (e.g., Yu 2008; Rajgopal and Venkatachalam

2011), we use the standard deviation of cash flow (STDCFO) and the idiosyncratic volatility of

stock returns (IDIO_RISK) to control for uncertainty in the forecast environment. Prior studies

(e.g., Lys and Soo 1995; Lim 2001; Irvine 2000, 2004; Jackson 2005) find that analysts have

incentives to generate commission revenues for their brokerage houses, which can lead to more

optimistic forecasts (and a lower likelihood of meeting or beating analyst forecasts). In general,

trading commissions are directly related to stock turnover. Therefore, we control for stock turnover

(TURNOVER) and expect its coefficient to be negative. Bushee (2001) finds that dedicated

investors focus more on long-term firm performance, which indicates that dedicated intuitional

investors are less likely to pressure managers to meet short-term performance targets set by

analysts. Thus, we control for dedicated institutional ownership, INST_DED.

Prior studies (e.g., Elgers and Lo 1994; Kang, O'Brien and Sivaramakrishnan 1994;

Darrough and Russell 2002) find that early forecasts made by analysts are more optimistic, which

can potentially increase the difficulty of meeting or beating analyst forecasts. We thus control for

analyst forecast horizon (FORECAST_HORIZON) and expect its coefficient to be negative. Firms

in the S&P 500 index have more incentives to achieve positive earnings outcomes and meet analyst

expectations. They are also, however, subject to more external monitoring. Following Yu (2008),

we control for whether firms are in the S&P 500 index (SP500). Finally, we control for external

13
financing activities (EXTFIN) as firms with greater reliance on external financing have more

incentives to avoid negative earnings surprises (Matsumoto 2002; Yu 2008).

We select the above control variables because they are shown in the prior literature to be

generally related to meeting or beating analyst forecasts. However, the incentives to engage in

meeting analyst forecasts can be very different from those for beating analyst forecasts. Hence

some of our control variables may be differentially related to the likelihood of MEET and BEAT.

For example, firms with higher growth opportunities (i.e., lower BM) may be incentivized to meet

rather than beat analyst forecasts by a large margin since these firms expect to turn to capital

markets for external funds in the near future. Hence, it is imperative for these firms to meet not

only current earnings forecasts, but also future earnings forecasts. A failure to meet analyst

earnings forecast can adversely affect the cost of external financing.

In estimating equation (1), we also include two-digit SIC industry, year, and quarter fixed

effects to control for systematic industry and time effects influencing a firms likelihood to meet

or beat analyst earnings forecasts. We estimate the standard errors with clustering on both firm

and quarter to avoid overstating the statistical significance of our estimates (Petersen 2009).

4. Empirical Results

4.1. Descriptive statistics

Table 1 presents the descriptive statistics for our sample. The mean value of MEET (BEAT)

is 0.186 (0.539), indicating that firms meet (beat) consensus analyst forecasts in 18.6 (53.9) percent

of our firm-quarters. This is higher than the finding of 65 percent (zero and positive earnings

surprises) documented in Matsumoto (2002) and 58 percent reported in Brown (2001), indicative

of an increasing time trend. The mean (median) value of COVERAGE is 3.837 (2.000), suggesting

14
that the distribution of analyst coverage is skewed to the right (Skewness = 2.154).14 The skewness

of LOG_COVERAGE is 0.537, indicating that a logarithmic transformation effectively reduces the

skewness of analyst coverage.

[Insert Table 1]

As for our control variables, the mean (median) value of MEG is 0.253 (0), indicating that

management earnings guidance is provided only for 25 percent of firm-quarters. On average,

discretionary accruals are -1.5 percent of lagged assets. 15 Relative to the same quarter of the

previous year, firms experience a positive change in earnings (POSUE) in 60 percent of the firm-

quarters. The mean (median) value of INDGR is 0.037 (0.036). Our sample firms are relatively

large and perform well in the stock market, with an average market capitalization of $1,035 million

and an average RETURN of 17.9 percent.16 As for the accounting performance measures, the mean

values of LAG_ROA and EXPECTED_ROA are 0.033 and 0.032, respectively. The average sample

firm has an asset growth rate of 3.2 percent and BM of 0.502. On average, our sample firms have

6.5 percent of common shares held by dedicated institutional investors, and analyst forecasts are

made 23.69 (exp(3.165)) days before the earnings announcement date.

4.2. Correlations

14
If it is greater than 2 or less than -2, the skewness is substantial and the distribution is far from symmetrical (West,
Finch, and Curran 1995). As a robustness check, we also use logarithmic transformation for ASSETGR, STDCFO, and
EXTFIN, which have Skewness greater than 2. Our findings remain unchanged.
15
We do find the mean value of discretionary accruals to be zero using the universe of Compustat firms. Thus, the
negative mean value of discretionary accruals for our final sample is due to the sample selection process, as firms
covered by the intersection of different databases tend to be large firms that are less likely to engage in aggressive
earnings management. In an untabulated robustness test, we re-estimate the discretionary accruals using only firms
covered by the intersection of COMPUSTAT, CRSP and IBES, rather than using the universe of Compustat firms.
The results are very similar to those reported in our tabulated results.
16
The exponential of the mean value of SIZE is $1,035 million (exp(6.942)). The mean return (17.9 percent) appears
to be high. We calculate returns for CRSP/Compustat merged firms and find an average return of 18.04 percent. If we
focus only on CRSP firms followed by at least one analyst, the average stock return is 21.1 percent. The average return
for the Dow Jones Industrial Average over the sample period is 8.45 percent, suggesting high survivorship bias in
analyst covered firms, consistent with McNichols and O'Brien (1997) and Lin and McNichols (1998).
15
 Table 2 reports the Pearson correlations for the variables used in our main model. The

correlation between MEET and LOG_COVERAGE is 0.015 and statistically significant at the 0.01

level. This positive correlation supports both the competition and pressure views. BEAT is

positively correlated with LOG_COVERAGE, with a correlation coefficient of 0.040, suggesting

that firms with greater analyst coverage are more likely to beat analyst earnings forecasts. This is

consistent with the competition view. Overall, the findings from the univariate analysis supports

the competition and pressure views. However, the univariate analysis does not control for cross-

sectional variation in other firm characteristics that may impact the likelihood of MEET/BEAT.

Furthermore, the univariate analysis does not take into consideration the endogeneity concerns

involving the analyst coverage variable. We turn to multivariate analysis to address these issues.

[Insert Table 2]

4.3. The impact of analyst coverage on the probability of meeting or beating analysts forecasts

Table 3 presents the multinomial logistic regression results from estimating equation (1).

Among 52,537 firm-quarters, firms meet analysts earnings forecasts in 9,772 firm-quarters, and

beat analysts earnings forecasts in 28,317 firm-quarters.

In columns (1) and (2), we first estimate a baseline multinomial logistic model that includes

all variables except LOG_COVERAGE. Column (1) shows the impact of control variables on the

likelihood of meeting analyst forecasts while column (2) reports the impact of control variables on

the likelihood of beating analyst forecasts, and both are relative to the likelihood of missing

analysts earnings forecasts. The Pseudo R-square for the baseline model is 0.171. The coefficient

on MEG is significantly positive in both columns (1) and (2), consistent with the notion that

managers use expectations management to lower analyst earnings targets so that firms are able to

meet or beat them (Bartov et al. 2002; Matsumoto 2002). The coefficient on ABACC is only

16
significantly positive in column (1). This finding is consistent with the prior literature on myopia,

which shows that firms manage earnings to meet analyst forecasts (Matsumoto 2002).

[Insert Table 3]

The coefficients on other control variables are, in general, consistent with our predictions

except the coefficient on INDGR. One potential explanation is that firms in high growth industries

tend to be less cost conscious (McDougall et al. 1994). These firms are more likely to engage in

new product development and have high cost levels for management, marketing, distribution, and

building brand name, which could affect their abilities to meet analyst expectations. The

significantly negative coefficient on EXTFIN in column (2) is different from our prediction but is

consistent with Loughran and Ritter (1997) who find poor operating performance immediately

following stock issuance for firms conducting seasoned equity offerings. We also note that the

coefficient estimates of BM and TURNOVER are negative in column (1) but positive in column

(2). The result regarding BM is consistent with prior evidence that missing analyst forecasts has

non-trivial adverse consequences on growth firms (e.g., Skinner and Sloan 2002). As such, firms

with higher growth opportunity (i.e., lower BM) have more incentives to meet analyst forecasts

and also to smooth earnings (avoid beating analyst forecasts by a large margin) so that they can

continue to meet analyst expectations in the future. Firms with high TURNOVER usually receive

increased investor interest because of strong performance (Mehran and Peristiani 2010). Thus,

these firms are more likely to beat analyst forecasts by a large margin. Firms with high

TURNOVER are also more transparent (Mehran and Peristiani 2010), hence less able to engage in

the meeting analyst expectations game (meet or beat analyst forecasts by one cent).

Columns (3) and (4) report the multinomial logistic regression results from estimating

equation (1) that includes LOG_COVERAGE along with all the control variables. The Pseudo R-

17
square increases to 0.192, which is a 12.3 percent increase relative to the Pseudo R-square in the

baseline model, 0.171, suggesting that the analyst coverage variable provides incremental

explanatory power. In column (3), the coefficient on LOG_COVERAGE is positive (0.183) and

statistically significant at the 0.01 level, suggesting that greater analyst coverage increases the

likelihood of MEET. This finding is consistent with the pressure view that greater analyst coverage

imposes more pressure on management to meet analyst earnings expectations. In column (4), the

coefficient on LOG_COVERAGE is positive (0.018) and statistically significant at the 0.10 level,

indicating that greater analyst coverage also increases the likelihood of BEAT. This finding

provides some evidence consistent with the competition view that greater analyst coverage reduces

the optimistic bias in analyst forecasts, hence improving the ability of firms to beat analyst

forecasts. The evidence thus far rules out the monitoring view.

A further coefficient comparison test (0.183 vs. 0.018) reveals that the effect of analyst

coverage on the probability of MEET is significantly larger than (p-value < 0.001) its impact on

the probability of BEAT.17 To gauge the economic significance, we compute the marginal effect of

analyst coverage. Holding all the control variables at their means, a one standard deviation increase

in LOG_COVERAGE increases the probability of MEET by 2.13 percent. Given that the mean

value of MEET is 18.6 percent, the effect of analyst coverage is economically significant. In

contrast, holding all the control variables at their means, a one standard deviation increase in

LOG_COVERAGE is only associated with a 1.18 percent increase in the probability of BEAT.

Given that the mean value of BEAT is 53.9 percent, the effect of analyst coverage on beating

analyst forecasts by a large margin does not appear to be economically significant. Taken together,

17
When we use firms beating analysts earnings forecasts by more than one cent as the reference group, we continue
to find that greater analyst coverage significantly increases the likelihood of meeting analyst forecasts.
18
the evidence shows that the effect predicted by the pressure view has a bigger incremental impact

than that suggested by the competition view.

4.4. Endogeneity of analyst coverage

Analyst coverage can be associated with certain firm characteristics, which, in turn, can

affect the likelihood of meeting analyst expectations (Bhushan 1989; OBrien and Bhushan 1990;

Kasznik 1999; Barth et al. 2001; Dechow and Dichev 2002; Yu 2008). To address this potential

endogeneity concern, we employ three approaches: (1) using a change model specification, (2)

exploiting negative exogenous shocks to analyst coverage due to mergers and closures of

brokerage houses, and (3) exploiting positive exogenous shocks to analyst coverage arising from

spinoffs of conglomerates.18

4.4.1. A change model specification

One common approach to addressing the endogeneity issue is to use a change model

specification to mitigate concerns regarding correlated omitted variables. We classify the changes

in meeting or beating analyst forecasts into five categories: 1) CHG_TO_MEET, which captures

the firms that failed to meet the consensus analyst forecast in the previous quarter but meet it in

the current quarter; 2) CEASE_TO_MEET, which are the firms that met the consensus analyst

forecast in the previous quarter but fail to do so in the current quarter; 3) CHG_TO_BEAT, which

contains the firms that did not beat the consensus analyst forecast in the previous quarter but beat

it in the current quarter; 4) CEASE_TO_BEAT, which captures the firms that beat the consensus

18
We also use an instrumental variable approach to address the endogeneity issue. Specifically, we adopt Yus (2008)
model specification, including determinants such as prior firm performance, expected firm performance, firm size,
trading volume, intangible assets, and institutional ownership, to derive residuals as a proxy for the exogenous
component of analyst coverage. We continue to find a positive relation between this exogenous measure of analyst
coverage and whether a firm meets or beats analyst earnings forecasts. However, the more pronounced relation is that
between this analyst coverage measure and the likelihood of MEET, consistent with those from our main tests.

19
analyst forecast in the previous quarter but fail to do so in the current quarter; 5) the rest of the

firm-quarters, which serve as the benchmark firm-quarters in the multinomial logistic regression.

The changes in analyst coverage (CHG_LOG_COVERAGE) and other control variables are

computed by taking the differences in the values between the current and previous quarters.

Columns (1) - (4) of Table 4 present the multinomial logistic regression results for

assessing the impact of CHG_LOG_COVERAGE on the likelihood of CHG_TO_MEET,

CEASE_TO_MEET, CHG_TO_BEAT, and CEASE_TO_BEAT, respectively. We find that the

coefficient on CHG_LOG_COVERAGE is 0.163 in column (1) and is -0.085 in column (2), and

both are statistically significant at the 0.01 level. These results imply that an increase in analyst

coverage is associated with an increased (decreased) likelihood of meeting (failing to meet) analyst

earnings forecasts. With respect to the likelihood of CHG_TO_BEAT, we find that the coefficient

on CHG_LOG_COVERAGE is -0.161 in column (3) and statistically significant at the 0.01 level,

inconsistent with the competition view. In column (4), the coefficient on CHG_LOG_COVERAGE

is 0.014 but statistically insignificant at the conventional level. These results provide evidence that

an increase in analyst coverage is associated with a decreased likelihood of beating analyst

earnings forecasts, which, on the other hand, suggests that firms with greater analyst coverage are

under pressure to smooth earnings so that they can continue to meet analyst expectation in the

future periods.

[Insert Table 4]

The change model specification also enables us to better gauge the economic significance

of the impact of analyst coverage. We find that a one-standard-deviation increase in

CHG_LOG_COVERAGE is associated with a 1.55 percent increase in the probability of

20
CHG_TO_MEET. Given that the mean value of CHG_TO_MEET is 12.5 percent, the effect of

analyst coverage on meeting analyst expectations is economically significant.

4.4.2. Negative exogenous shocks to analyst coverage: Brokerage house mergers and closures

We follow Hong and Kacperczyk (2010) and Kelly and Ljungqvist (2012) and use

brokerage house mergers and closures as a source of exogenous variation in analyst coverage.

Brokerage house mergers involve the elimination of analysts due to redundancy, culture clash, and

merger-related turmoil. The closure setting often results in involuntary coverage termination.

According to the pressure/competition view, the decrease in analyst coverage will lower the

likelihood of MEET/BEAT. The converse is expected by the monitoring view.

To carry out this analysis, we first matched the 15 mergers of brokerage houses identified

by Hong and Kacperczyk (2010) and the 43 brokerage closures identified by Kelly and Ljungqvist

(2012) with our sample. We focus on one year before and after each event and create a

dichotomous variable, POST, which equals one for the quarters in the year following the

merger/closure, and zero for the quarters in the year prior to the event. We create another

dichotomous variable, MERGER_CLOSURE, which equals one for firms that were covered by

brokerage houses that experience the merger or closure, and zero otherwise. It is possible that these

events may not result in decreased coverage for all firms covered by merged/closed brokerage

houses. Thus, we track analyst following before and after brokerage mergers/closures and identify

only those firms with decreased analyst coverage as firms that experienced a negative exogenous

shock to their analyst coverage. We estimate the following multinomial logistic regression model:

P(MEET,BEAT) = + 1*MERGER_CLOSURE + 2*POST

+ 3*MERGER_CLOSURE*POST + 4*MEG + 5*ABACC + 6*POSUE + 7*INDGR
+ 8*SIZE + 9*RETURN + 10*LAG_ROA + 11*EXPECTED_ROA + 12*LEVERAGE
+ 13*BM + 14*ASSETGR+ 15*STDCFO + 16*IDIO_RISK + 17*TURNOVER + 18*INST
+ 19*FORECAST_HORIZON+ 20*SP500 + 21*EXTFIN + (2)
21
 Table 5, panel A presents the multinomial logistic regression results from estimating

equation (2). In column (1), the coefficient on MERGER_CLOSURE*POST is negative and

significant at the 0.05 level, suggesting that relative to control firms, the likelihood of MEET is

significantly lower for firms with decreased analyst coverage in the post-merger/closure period

compared to that of the pre-merger/closure period. This finding supports the pressure view that

decreased analyst coverage eases the pressure on managers to meet analyst expectations.19 The

marginal effect of MERGER_CLOSURE*POST is -4.88 percent. Given that the mean value of

MEET is 18.6 percent, the effect of brokerage mergers/closures is economically significant as well.

Inconsistent with the competition view, the coefficient on MERGER_CLOSURE*POST is positive

and insignificant in column (2).

[Insert Table 5]

4.4.3. A positive exogenous shock to analyst coverage: Spinoffs of conglomerates

Gilson et al. (2001, 567) argue that spinoff firms will experience an increase in analyst

coverage because these firms face higher investor interest and analysts will increase coverage due

to new investment banking opportunities for brokerage houses. Therefore, conglomerate

spinoffs can serve as positive exogenous shocks to analyst coverage. We use the SDC Platinum

database to identify firms that had spinoffs and examine whether they are more likely to meet/beat

analyst forecasts in the post-spinoff period relative to control firms. The results are presented in

Table 5, panel B. We find that the coefficient on SPINOFF*POST is positive (1.739) in column

(1) and significant at the 0.10 level. This finding indicates that following spinoffs, firms exhibit an

19
We also examine the effects on firms for which analyst coverage did not change after brokerage mergers/closures.
We find that the likelihood of meeting analyst forecasts is not significantly different between the post-and pre-
merger/closure periods, suggesting that our finding is not event specific but due to the decline in analyst coverage.
22
increased likelihood of MEET relative to control firms, supporting the pressure view that increased

analyst coverage raises the pressure on managers to meet analyst forecasts. Inconsistent with the

competition view, the coefficient on SPINOFF*POST is negative and not significant in column

(2).

4.5. Analyst coverage and market reaction to earnings surprises

The causal mechanism underlying the pressure view is that greater analyst coverage

increases the price reaction to firm-specific news events. To shed light on this causal mechanism,

we examine how the market reaction (the three-day cumulative abnormal returns around earnings

announcements) to earnings surprises relates to analyst coverage. Our results are reported in Table

6, panel A. For the full sample, we find that the market reaction is positively related to earnings

surprises. More importantly, we find that the market reaction to earnings surprises increases with

analyst coverage, suggesting that the penalty (benefit) associated with missing (meeting/beating)

analyst forecasts is amplified in the presence of greater analyst coverage.

We further explore this relation by classifying earnings surprises into three categories: (1)

EARN_SURP_MISS, which reflects negative earnings surprises for firms that miss analyst earnings

forecasts and 0 otherwise, (2) EARN_SURP_MEET, which reflects earnings surprises for firms

that meet analyst earnings forecasts and 0 otherwise, and (3) EARN_SURP_BEAT, which reflects

earnings surprises for firms that beat analyst earnings forecasts and 0 otherwise. We include

interaction terms of LOG_COVERAGE with these three piecewise measures of earnings surprises.

We find the coefficient on LOG_COVERAGE*EARN_SURP_MISS is positive (0.006) and

statistically significant at the 0.01 level, suggesting that greater analyst coverage amplifies the

negative market reaction to negative earnings surprises. The coefficients on

LOG_COVERAGE*EARN_SURP_MEET and LOG_COVERAGE*EARN_SURP_BEAT are

23
positive but insignificant at the 0.10 level, suggesting that the positive effect of analyst coverage

on the market reaction to earnings surprises documented in column (1) is driven by firms that miss

their analyst earnings forecasts. A possible explanation is that since firms do not withhold better-

than-expected good news, the marginal contribution of analysts in disseminating this good news

is limited (Hong et al. 2000). The higher magnitude of the coefficient on EARN_SURP_MEET

reflects a scale effect because earnings surprises for this group of firms fall within a small interval.

Together, these findings are consistent with the argument that greater analyst coverage raises the

price reaction to firm-specific news, particularly negative news regarding missing analysts

earnings forecasts, which induces managers to avoid missing these forecasts.

[Insert Table 6]

4.6. The effect of analyst coverage on downward management earnings guidance

Prior studies (e.g., Matsumoto 2002; Richardson, Teoh, and Wysocki 2004; Cotter, Tuna

and Wysocki 2006) find that managers lower analyst expectations to achieve positive earnings

surprises. An implication of the competition view is that greater analyst coverage lowers analyst

forecast optimism and, hence, lowers the need for downward earnings guidance. In contrast, the

pressure view posits that greater analyst coverage imposes pressure on managers to meet short-

term performance benchmarks such as analyst earnings forecasts, implying a positive relation

between analyst coverage and the use of downward earnings guidance.20

To capture the frequency of downward earnings guidance during a quarter, we create a

variable, MEG_DOWN_FREQ, computed as the natural logarithm of (1+ the frequency of

20
According to Yus (2008) monitoring view, greater analyst coverage constrains managerial reporting discretion.
However, it does not offer specific guidance on the issue of expectations management. Since the monitoring view
does not stress the importance of meeting short-term performance benchmarks, we assume the monitoring view does
not anticipate any relation between analyst coverage and downward earnings guidance.
24
downward guidance). Following Feng and McVay (2010), we compare management earnings

forecast with the preceding consensus analyst forecast. We classify a management earnings

forecast as downward guidance, if it is lower than the preceding analyst consensus earnings

forecast. Table 6, panel B reports the regression results. Analyst coverage, in general, has a positive

relation with downward earnings guidance, which is consistent with the pressure view that greater

analyst coverage induces managers to use guidance to meet analysts forecasts. Moreover, the

coefficient on the interaction variable, LOG_COVERAGE*MEET, is positive (0.023) and

significant at the 0.01 level, implying that firms with greater analyst coverage are more prone to

use downward earnings guidance to meet analyst earnings forecasts. In contrast, the coefficient on

LOG_COVERAGE*BEAT is negative and significant at the 0.01 level, suggesting that firms whose

earnings far exceed analyst forecasts use less downward earnings guidance. This set of evidence

demonstrates that downward guidance is used by managers who are under pressure from analysts

to meet analyst expectations.

4.7. The impact of dedicated institutional investors and dual-class share voting structure

He and Tian (2013) posit that the presence of dedicated institutional investors and anti-

takeover structures can serve as pressure shields that insulate managers from the pressure

imposed by analysts. Specifically, dedicated institutional investors have a long-term focus and,

hence, are less likely to penalize their managers for not meeting analyst forecasts. An ownership

structure with dual-class voting shares, one of the most common forms of anti-takeover defense,

also eases the pressure on managers to meet analyst forecasts, because outside shareholders may

not have sufficient voting rights to oust managers when they fail to meet these short-term targets.

The results (untabulated) show that dedicated institutional investors and dual-class share structures

attenuate the positive influence of analyst coverage on the likelihood of MEET, but has no

25
significant effect on the relation between analyst coverage and the likelihood of BEAT. The

evidence again supports the pressure view in that pressure shields soften the pressure imposed

by greater analyst coverage to meet analyst earnings forecasts.

4.8. The inter-temporal analysis on the effect of analyst coverage on MEET/BEAT

The enactment of Internal Revenue Code 162 (m) in 1993 limits the tax deduction of non-

performance-related compensation to $1 million per executive. This tax reform led to an increase

in the use of performance-based compensation such as stock options (e.g. Perry and Zenner 2001;

Core et al. 2003; Balsam and Ryan 2008). This change in compensation structure towards stock-

based compensation raises managerial incentives to meet or beat analyst earnings forecasts since

failure to do so (i.e., negative earnings surprises) negatively impacts equity values and resultant

managerial wealth. To evaluate this prediction, we evenly partition our sample period into 3 sub-

sample periods (1995-2000, 2001-05, and 2006-11). We find that analyst coverage has a

significant impact on MEET in the second and third sub-sample periods but not in the first sub-

sample period. In addition, analyst coverages effect is significantly stronger in the second and

third sub-sample periods than in the first sub-sample period while there is no significant difference

between the second and third sub-sample periods. These inter-temporal analysis results also

support the pressure view as they suggest that the positive relation between analyst coverage and

the likelihood of MEET is related to the underlying changes in managerial incentives.

5. Conclusion

This study examines the relation between analyst coverage and whether a firm meets or

beats analyst earnings forecasts. We document several main findings that are consistent with the

pressure view but not with the competition and monitoring views. First, while we find a positive

relation between analyst coverage and whether a firm meets or beats analyst earnings forecasts,

26
we find this relation is more pronounced with respect to whether a firm meets its analyst forecasts.

When we consider exogenous shocks to analyst coverage due to brokerage mergers or closures

and conglomerate spinoffs, we only find a positive relation between analyst coverage and whether

a firm meets its analyst forecasts. Second, we find that greater analyst coverage increases the price

reaction to earnings surprises, particularly when a firm misses its analyst earnings forecasts. This

evidence suggests greater analyst coverage raises the pressure to at least meet analyst forecasts.

Consistent with this argument, we find that as analyst coverage increases, downward management

guidance is used more by firms that meet analyst forecasts.

Our study contributes to the inquiry on the effects of analyst coverage. Prior research has

largely emphasized the relation between analyst coverage and firm information environment. The

present study focuses on the impact of analyst coverage on meeting and beating analyst earnings

forecasts. We take a comprehensive look at the various views that speak to this relation. Based on

our evidence, we find the pressure view best describes the relation between analyst coverage and

whether a firm meets or beats its analyst earnings forecasts. Overall, our study deepens our

understanding of the effects of analyst coverage.

27
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33
TABLE 1
Descriptive statistics

Variable Mean Median Q1 Q3 Std Dev. Skewness

MEET 0.186 0.000 0.000 0.000 0.389 1.612
BEAT 0.539 1.000 0.000 1.000 0.499 -0.155
COVERAGE 3.837 2.000 1.000 5.000 3.986 2.154
LOG_COVERAGE 0.940 0.693 0.000 1.609 0.867 0.537
MEG 0.253 0.000 0.000 1.000 0.435 1.161
ABACC -0.015 -0.013 -0.044 0.014 0.070 0.098
POSUE 0.599 1.000 0.000 1.000 0.490 -0.401
INDGR 0.037 0.036 -0.008 0.081 0.104 1.221
SIZE 6.942 6.823 5.659 8.096 1.790 0.303
RETURN 0.179 0.091 -0.179 0.396 0.595 1.700
LAG_ROA 0.033 0.035 0.020 0.051 0.036 -1.622
EXPECTED_ROA 0.032 0.035 0.018 0.053 0.043 -1.485
LEVERAGE 0.226 0.206 0.044 0.345 0.196 0.842
BM 0.502 0.418 0.253 0.654 0.399 1.694
ASSETGR 0.032 0.015 -0.013 0.050 0.118 3.308
STDCFO 0.065 0.054 0.040 0.075 0.043 2.881
IDIO_RISK -2.333 -2.333 -2.699 -1.978 0.525 0.068
TURNOVER 0.191 0.145 0.081 0.250 0.158 1.825
INST_DED 0.065 0.019 0.000 0.107 0.088 1.528
FORECAST_HORIZON 3.165 3.325 2.914 3.638 0.731 -1.936
SP500 0.247 0.000 0.000 0.000 0.431 1.204
EXTFIN 0.079 0.017 0.003 0.080 0.143 2.865

The final sample includes 4,151 unique firms with 52,537 firm-quarter observations covering the period 1996 through
2011. MEET equals 1 if the difference between the actual earnings per share and the consensus analyst forecast of
earnings per share is in the range of [0, 1 cent], 0 otherwise; BEAT equals 1 if a firms actual earnings exceeds the
consensus analyst forecast by more than one cent at the earnings announcement, 0 otherwise; COVERAGE is the
number of analysts who issue forecasts of the firms quarterly earnings; MEG equals 1 if the firm provides
management earnings guidance for that quarter, 0 otherwise; ABACC is signed performance adjusted abnormal
accruals calculated based on Kothari et al. (2005); POSUE equals 1 if seasonal change in earnings before extraordinary
items is positive, 0 otherwise; INDGR is the value-weighted average of annual sales growth in each 2-digit SIC
industry calculated over 12 months before the fiscal quarter end; SIZE is the natural logarithm of market value of
equity; RETURN is stock returns during the past 12 months; LAG_ROA is the return on asset at quarter t-1;
EXPECTED_ROA is the expected return on assets of quarter t+1; LEVERAGE is the sum of short-term and long-term
debt scaled by total assets. BM is book value of equity divided by market value of equity; ASSETGR is the change of
total assets scaled by lagged total assets; STDCFO is the standard deviation of cash flows over lagged assets in the
past 20 quarters (5 years); IDIO_RISK is firm idiosyncratic risk calculated as the natural logarithm of the variance of
monthly abnormal stock returns over the past 12 months based on the market model; TURNOVER is the mean of
monthly trading volume over the number of outstanding shares during the fiscal quarter; INST_DED is the percentage
of common shares owned by dedicated institutional investors; FORECAST_HORIZON is the natural logarithm of the
average number of days between the last analyst forecasts and earnings announcement; SP500 equals 1 if the firm
belongs to the S&P 500 index, 0 otherwise; EXTFIN is the sum of net cash receipts from equity and debt issuance,
scaled by total assets.

34
TABLE 2
Pearson correlations
LOG_ LAG EXPECTED FORECAST
BEAT MEG ABACC POSUE INDGR SIZE RETURN LEVERAGE BM ASSETGR STDCFO IDIO_RISK TURNOVER INST_DED SP500 EXTFIN
COVERAGE _ROA _ROA _HORIZON
MEET -0.517 0.015 0.066 -0.002 -0.011 -0.002 0.005 -0.038 0.034 0.030 -0.056 -0.049 -0.003 0.007 -0.004 -0.054 -0.016 -0.051 0.010 -0.012
BEAT 0.040 0.037 -0.018 0.207 0.021 0.132 0.129 0.062 0.073 -0.014 -0.051 0.043 -0.036 -0.062 0.070 0.038 0.008 0.071 -0.030
LOG_COVERAGE 0.132 -0.075 -0.045 -0.018 0.514 -0.048 0.142 0.119 0.056 -0.070 0.000 -0.097 -0.142 0.228 -0.034 0.056 0.397 -0.045
MEG -0.051 -0.010 0.008 0.119 -0.046 0.078 0.077 -0.091 -0.006 -0.013 -0.044 -0.049 0.080 0.010 -0.028 0.074 -0.048
ABACC 0.011 -0.058 -0.155 -0.052 -0.324 -0.287 0.077 0.083 0.018 0.099 0.075 -0.049 0.020 0.005 -0.079 0.093
POSUE 0.058 0.131 0.232 0.204 0.159 -0.056 -0.188 0.093 -0.033 -0.109 -0.023 0.024 -0.002 0.043 -0.028
INDGR 0.027 0.066 -0.036 0.072 -0.002 -0.060 0.080 0.017 -0.004 -0.010 0.028 -0.002 0.005 0.091
SIZE 0.032 0.276 0.239 0.025 -0.355 0.031 -0.220 -0.476 0.112 0.058 -0.037 0.701 -0.103
RETURN 0.086 0.077 -0.041 -0.194 0.147 0.034 0.079 0.061 0.064 -0.002 -0.047 0.056
LAG_ROA 0.813 -0.036 -0.149 0.055 -0.218 -0.254 -0.042 0.047 -0.026 0.146 -0.121
EXPECTED_ROA -0.043 -0.144 0.083 -0.204 -0.232 -0.036 0.019 -0.020 0.125 -0.114
LEVERAGE -0.013 0.097 0.282 0.010 0.089 -0.010 0.007 0.134 0.089
BM 0.097 0.282 0.010 0.089 0.014 0.007 0.134 0.089
ASSETGR 0.107 0.041 0.072 -0.070 0.011 -0.044 0.272
STDCFO 0.279 0.150 -0.056 0.019 -0.159 0.127
IDIO_RISK 0.332 -0.155 0.041 -0.343 0.126
TURNOVER 0.297 -0.016 -0.011 0.049
INST_DED 0.031 0.066 -0.021
FORECAST_HORIZON -0.027 0.021
SP500 -0.129

The variables are defined as in Table 1. Correlations that are statistically insignificant at the 0.10 level are in italics.

35
TABLE 3
Multinomial logistic regression: The impact of analyst coverage on the probability of meeting or beating analyst earnings forecasts

Pred. (1) MEET (2) BEAT (3) MEET (4) BEAT

Variable Sign Coefficient p- value Coefficient p- value Coefficient p- value Coefficient p- value
Intercept -1.991 (0.00) -1.920 (0.00) -1.750 (0.00) -1.895 (0.00)
LOG_COVERAGE + 0.183 (0.00) 0.018 (0.09)
MEG + 0.696 (0.00) 0.463 (0.00) 0.658 (0.00) 0.458 (0.00)
ABACC + 0.364 (0.08) 0.195 (0.27) 0.369 (0.08) 0.196 (0.27)
POSUE + 0.486 (0.00) 0.742 (0.00) 0.509 (0.00) 0.743 (0.00)
INDGR + -0.433 (0.01) -0.390 (0.00) -0.440 (0.00) -0.390 (0.00)
SIZE + 0.106 (0.00) 0.140 (0.00) 0.063 (0.00) 0.135 (0.00)
RETURN + 0.107 (0.00) 0.377 (0.00) 0.122 (0.00) 0.379 (0.00)
LAG_ROA ? -2.620 (0.00) -8.768 (0.00) -2.792 (0.00) -8.813 (0.00)
EXPECTED_ROA + 5.350 (0.00) 11.287 (0.00) 5.475 (0.00) 11.327 (0.00)
LEVERAGE ? -0.919 (0.00) -0.296 (0.00) -0.936 (0.00) -0.298 (0.00)
BM - -0.341 (0.00) 0.086 (0.03) -0.372 (0.00) 0.084 (0.03)
ASSETGR + -0.006 (0.96) -0.086 (0.42) 0.004 (0.98) -0.084 (0.43)
STDCFO - -0.264 (0.58) -0.112 (0.76) -0.311 (0.51) -0.105 (0.78)
IDIO_RISK - 0.001 (1.00) -0.233 (0.00) -0.018 (0.70) -0.234 (0.00)
TURNOVER - -0.309 (0.06) 0.809 (0.00) -0.481 (0.00) 0.792 (0.00)
INST_DED - -0.338 (0.15) 0.183 (0.33) -0.368 (0.12) 0.181 (0.34)
FORECAST_HORIZON - -0.198 (0.00) -0.033 (0.04) -0.217 (0.00) -0.034 (0.03)
SP500 ? -0.017 (0.80) -0.028 (0.59) -0.046 (0.50) -0.031 (0.55)
EXTFIN + -0.081 (0.49) -0.162 (0.09) -0.082 (0.49) -0.162 (0.09)
Industry fixed effect Yes Yes
Year fixed effect Yes Yes
Quarter fixed effect Yes Yes
N 52,537 52,537
N of each category 9,772 28,317 9,772 28,317
Pseudo R 2 0.171 0.192

The variables are defined as in Table 1. Reported p-values are two-tailed.

36
TABLE 4
Multinomial logistic regression: The impact of analyst coverage on the probability of meeting or beating analyst earnings forecasts - change analysis
Pred. (1) CHG_TO_MEET (2) CEASE_TO_MEET (3) CHG_TO_BEAT (4) CEASE_TO_BEAT
Variable Sign Coefficient p- value Coefficient p- value Coefficient p- value Coefficient p- value
Intercept -2.836 (0.00) -3.274 (0.00) -1.494 (0.00) -1.561 (0.00)
CHG_LOG_COVERAGE + 0.163 (0.00) -0.085 (0.00) -0.061 (0.00) 0.014 (0.47)
CHG_MEG + 0.201 (0.00) -0.086 (0.31) 0.066 (0.14) -0.164 (0.01)
CHG_ABACC + 0.408 (0.01) -0.415 (0.15) 0.117 (0.52) -0.584 (0.00)
CHG_POSUE + 0.038 (0.38) -0.053 (0.45) 0.518 (0.00) -0.205 (0.00)
CHG_INDGR + 0.015 (0.89) 0.460 (0.00) -0.028 (0.77) 0.265 (0.04)
CHG_SIZE + -0.146 (0.01) -0.468 (0.00) -0.418 (0.00) -0.151 (0.01)
CHG_RETURN + 0.042 (0.16) 0.009 (0.85) 0.155 (0.00) -0.085 (0.01)
CHG_LAG_ROA ? -4.059 (0.00) -4.280 (0.01) 6.424 (0.00) -7.468 (0.00)
CHG_EXPECTED_ROA + 1.137 (0.08) -4.180 (0.00) 2.118 (0.00) -4.248 (0.00)
CHG_LEVERAGE ? 0.005 (0.98) 0.884 (0.02) -0.045 (0.83) 0.228 (0.38)
CHG_BM - 0.027 (0.76) 0.060 (0.67) -0.054 (0.45) -0.265 (0.00)
CHG_ASSETGR + 0.049 (0.61) 0.174 (0.24) 0.188 (0.04) 0.268 (0.02)
CHG_STDCFO - -0.963 (0.39) -5.169 (0.00) -1.880 (0.05) 0.994 (0.45)
CHG_IDIO_RISK - -0.087 (0.12) 0.096 (0.28) -0.042 (0.37) 0.174 (0.00)
CHG_TURNOVER - -0.259 (0.33) -0.828 (0.03) -0.018 (0.93) -0.279 (0.31)
CHG_INST_DED - -0.064 (0.82) 0.442 (0.31) 0.328 (0.21) -0.104 (0.74)
CHG_FORECAST_HORIZON - -0.112 (0.00) 0.155 (0.00) 0.056 (0.00) 0.001 (0.97)
CHG_SP500 ? 0.170 (0.42) -0.322 (0.44) -0.165 (0.45) -0.114 (0.63)
CHG_EXTFIN + 0.019 (0.88) 0.423 (0.03) -0.115 (0.28) 0.184 (0.16)
Industry fixed effect Yes
Year fixed effect Yes
Quarter fixed effect Yes
N 49,276
N of each category 6,184 2,289 10,110 5,883
Pseudo R 2 0.092

CHG_TO_MEET (CEASE_TO_MEET) equals one if the firm fails to meet (meets) analyst forecasts in the previous quarter but meets consensus analyst forecast
(fails to meet) in the current quarter, and zero otherwise; CHG_TO_BEAT (CEASE_TO_BEAT) equals one if the firm does not beat (beat) analyst expectations in
the previous quarter but beats (fails to beat) consensus analyst forecast in the current quarter by more than one cent, and zero otherwise. All the change variables
are measured as the change of their values from quarter t-1 to quarter t. Reported p-values are two-tailed.
37
TABLE 5
Multinomial logistic regression: The impact of exogenous shocks to analyst coverage on the probability of meeting
or beating analyst earnings forecasts

Panel A: Broker mergers and closures

Pred. (1) MEET (2) BEAT

Variable Sign Coefficient p- value Coefficient p- value
Intercept -12.484 (0.00) -1.935 (0.00)
MERGER_CLOSURE ? 0.152 (0.02) 0.101 (0.28)
POST ? 0.007 (0.89) -0.002 (0.96)
MERGER_CLOSURE*POST - -0.204 (0.02) 0.169 (0.25)
MEG + 0.638 (0.00) 0.418 (0.00)
ABACC + 0.373 (0.20) 0.319 (0.23)
POSUE + 0.526 (0.00) 0.765 (0.00)
INDGR + -0.327 (0.13) -0.136 (0.44)
SIZE + 0.082 (0.00) 0.130 (0.00)
RETURN + 0.090 (0.06) 0.371 (0.00)
LAG_ROA ? -2.474 (0.01) -8.733 (0.00)
EXPECTED_ROA + 4.739 (0.00) 11.051 (0.00)
LEVERAGE ? -0.987 (0.00) -0.223 (0.07)
BM - -0.313 (0.00) 0.113 (0.07)
ASSETGR + -0.082 (0.65) -0.106 (0.50)
STDCFO - -0.172 (0.77) -0.264 (0.59)
IDIO_RISK - -0.015 (0.82) -0.240 (0.00)
TURNOVER - -0.243 (0.28) 1.021 (0.00)
INST_DED - -0.474 (0.16) 0.230 (0.41)
FORECAST_HORIZON - -0.282 (0.00) -0.089 (0.00)
SP500 ? 0.038 (0.70) -0.087 (0.28)
EXTFIN + -0.298 (0.07) -0.406 (0.00)
Industry fixed effect Yes
Year fixed effect Yes
Quarter fixed effect Yes
N 20,797
N of each category 4,240 10,798
Pseudo R 2 0.162

MERGER_CLOSURE equals 1 for firms whose brokerage house experienced a merger or closure during our sample
period, 0 otherwise; POST is set equal 1 for the quarters in the year following the merger or closure of brokerage
houses and 0 for the quarters in the year prior to the merger or closure. The other variables are defined as in Table 1.
Reported p-values are two-tailed.

38
TABLE 5 (Cont.)
Panel B: Conglomerate spinoffs

Pred. (1) MEET (2) BEAT

Variable Sign Coefficient p- value Coefficient p- value
Intercept -0.275 (0.83) -1.164 (0.27)
SPINOFF ? -0.993 (0.08) 0.161 (0.78)
POST ? -0.119 (0.30) -0.088 (0.53)
SPINOFF*POST + 1.739 (0.07) -0.081 (0.93)
MEG + 0.622 (0.00) 0.303 (0.03)
ABACC + 0.623 (0.46) -1.532 (0.04)
POSUE + 0.214 (0.10) 0.609 (0.00)
INDGR + 0.911 (0.20) -0.411 (0.47)
SIZE + 0.086 (0.19) 0.169 (0.00)
RETURN + 0.034 (0.77) 0.480 (0.00)
LAG_ROA ? -0.086 (0.97) -12.272 (0.00)
EXPECTED_ROA + 6.544 (0.00) 12.874 (0.00)
LEVERAGE + -1.046 (0.02) 0.237 (0.49)
BM - -0.150 (0.55) 0.135 (0.49)
ASSETGR + 0.096 (0.85) 0.144 (0.71)
STDCFO - -2.351 (0.22) 0.378 (0.82)
IDIO_RISK - -0.168 (0.41) -0.140 (0.42)
TURNOVER - -0.432 (0.43) 0.248 (0.55)
INST_DED - -1.532 (0.12) -0.123 (0.88)
FORECAST_HORIZON - -0.108 (0.24) -0.023 (0.79)
SP500 ? -0.031 (0.90) -0.224 (0.29)
EXTFIN + -0.693 (0.17) -1.299 (0.00)
Industry fixed effect Yes
Year fixed effect Yes
Quarter fixed effect Yes
N 3,286
N of each category 643 1,750
Pseudo R 2 0.203

SPINOFF equals 1 for firms who experienced a spinoff during our sample period, 0 otherwise; POST is set equal to
1 for the quarters in the year following the spinoff and 0 for the quarters in the year prior to the spinoff. The other
variables are defined as in Table 1. Reported p-values are two-tailed.

39
TABLE 6
The impact of analyst coverage on the market reaction to earnings surprises and the use of downward earnings
guidance

Panel A: Ordinary least square regression analysis of the impact of analyst coverage on the market reaction to
earnings surprises

Pred. (1) Full Sample (2) Three Types of Earnings Surprise

Variable Sign Coefficient p- value Coefficient p- value
Intercept 0.008 (0.12) -0.044 (0.00)
EARN_SURP + 0.018 (0.00)
EARN_SURP*LOG_COVERAGE + 0.004 (0.00)
EARN_SURP_MISS + 0.010 (0.00)
EARN_SURP_MISS*LOG_COVERAGE + 0.006 (0.00)
EARN_SURP_MEET + -1.220 (0.56)
EARN_SURP_MEET*LOG_COVERAGE + 0.250 (0.87)
EARN_SURP_BEAT + 0.027 (0.00)
EARN_SURP_BEAT*LOG_COVERAGE + 0.001 (0.52)
LOG_COVERAGE + 0.001 (0.05) 0.001 (0.03)
SUE + 0.000 (0.18) 0.000 (0.21)
SIZE + 0.000 (0.38) 0.001 (0.00)
BM - 0.016 (0.00) 0.014 (0.00)
SALES_GROWTH + 0.025 (0.00) 0.024 (0.00)
DIV_YIELD - -0.014 (0.56) -0.027 (0.33)
RUN_UP + 0.018 (0.00) 0.017 (0.00)
Industry fixed effect Yes Yes
Year fixed effect Yes Yes
Quarter fixed effect Yes Yes
N 53,890 53,890
Adj. R 2 0.064 0.068

The dependent variable is CAR, 3-day cumulative abnormal returns around earnings announcement dates.
EARN_SURP is calculated as actual EPS minus analyst consensus earnings forecast scaled by stock price at the
beginning of the quarter. EARN_SURP_MISS which reflects negative earnings surprises for firms that miss analyst
earnings forecasts and 0 otherwise; EARN_SURP_MEET reflects earnings surprises for firms that meet analyst
earnings forecasts and 0 otherwise; EARN_SURP_BEAT reflects earnings surprises for firms that beat analyst earnings
forecasts and 0 otherwise; SUE is the seasonal change in earnings before extraordinary items. SALES_GROWTH is
the average of annual sales growth over the prior three years; DIV_YIELD is the quarterly dividend yield; RUN_UP
is the mean market-adjusted stock return for the 12 months prior to the earnings announcement. The other variables
are defined as in Table 1. Reported p-values are two-tailed.

40
TABLE 6 (Cont.)

Panel B: Ordinary least square regression analysis of the impact of analyst coverage on the use of downward
earnings guidance to meet or beat analyst earnings forecasts

Pred. MEG_DOWN_FREQ
Variable Sign Coefficient p- value
Intercept 0.045 (0.13)
LOG_COVERAGE + 0.006 (0.01)
LOG_COVERAGE*MEET + 0.023 (0.00)
LOG_COVERAGE*BEAT ? -0.019 (0.00)
MEET ? -0.004 (0.34)
BEAT ? -0.015 (0.00)
SIZE + 0.009 (0.00)
LAG_ROA + 0.098 (0.00)
BM - 0.004 (0.11)
ASSETGR + 0.023 (0.01)
STDCFO - -0.069 (0.00)
INST_DED ? -0.034 (0.02)
EXTFIN - -0.038 (0.00)
POSUE + 0.012 (0.00)
INDGR + 0.067 (0.00)
FE_FIRST + 0.325 (0.00)
LIT + -0.005 (0.24)
Industry fixed effect Yes
Year fixed effect Yes
Quarter fixed effect Yes
N 54,104
Adj. R 2 0.198

The dependent variable is MEG_DOWN_FREQ, which is the natural log of (1 + the frequency of downward
management guidance) for the fiscal quarter. FE_FIRST is the absolute value of the forecast error associated with
forecasts issued at the beginning of the quarter. LIT is an indicator variable that has a value of 1 if the firm is in high-
tech industry (SICs 2833-2836, 3570-3577, 7370-7374, 3600-3674, 5200-5961), 0 otherwise. The other variables are
defined as in Table 1. Reported p-values are two-tailed.

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