To blame or not to blame: Analysts’ reactions to external explanations for poor financial performance

Managers often provide self-serving disclosures that blame poor corporate financial performance on temporary, external factors. For example, many managers have pointed to the September 11th terrorist attacks and the downturn in the economy as explanations for their firm’s poor performance over the past year. Little is known about how financial analysts respond to such disclosures. Results of an experiment conducted with 94 financial analysts suggest that responses to self-serving management disclosures depend on the perceived plausibility of the disclosures. Specifically, we find that disclosures that blame poor performance on external factors tend to increase analysts’ earnings forecasts and stock valuations when analysts believe that the disclosures are plausible, but not otherwise. When analysts find managers’ self-serving disclosures to be implausible, they punish the firm with lower earnings forecasts and stock valuations than if the firm did not provide the disclosure. Thus, self-serving disclosures can backfire.