CEO turnover, communication disruption, and analyst forecast properties

Abstract

This study examines how disruption in the overall communication between analysts and CEOs arising from CEO turnover affects analyst forecast properties. Disruption in analyst-CEO overall communication reduces analysts’ opportunity to acquire relevant information for forecasts from CEOs, thereby increasing analyst forecast errors and dispersion. To build relationships and communication channels with an incoming CEO, analysts may issue earnings forecasts that are easy to meet or beat, thus increasing forecast pessimism. I posit that the incremental impact of outsider CEO succession on analyst forecast properties is greater than that of insider CEO succession because the former is likely to create greater disruption in the overall analyst-CEO communication. Consistent with my predictions, I find that outsider CEO successions have a positive incremental impact on analyst forecast errors, dispersion, and pessimism than do insider CEO successions. Corroborative evidence indicates that the impacts of outsider successions on analyst forecast properties are attenuated when the departing CEOs remain on board or when analysts previously followed the former employer of an outsider successor.