Why do analysts issue sales forecasts? Evidence from mandatory IFRS adoption

This study uses mandatory adoption of IFRS as a setting to investigate why financial analysts issue supplementary sales forecasts. The demand explanation proposes that analysts issue supplementary forecasts if earnings are not informative and thus investors demand additional accounting information. The reputation explanation posits that analysts are more likely to issue sales forecasts if these forecasts are more accurate and will not cause reputation damage. Using mandatory IFRS adoption as an exogenous shock to analysts’ information environment, we find that after firms mandatorily adopt IFRS, analysts are more likely to issue sales forecasts and analysts’ sales forecasts become more accurate and less dispersed. The effect of mandatory IFRS adoption is stronger in countries with strong law enforcement and a large difference between local GAAP and IFRS. Further analysis shows that the IFRS effect concentrates on analysts with prior experience with IAS. Overall, the results provide support to the reputation explanation.