Nickels Not Pennies: Granularity in Analysts' Earnings per Share Forecasts and Forecast Revisions

Abstract

This article extends the study of Herrmann and Thomas (2005) on granularity in analyst forecasts at multiples of nickels and finds that forecasts at multiples of nickels are more optimistic, and induce weaker market responses. Granularity in analyst forecasts combined with managers' incentive to meet forecasts help explain discontinuity in actual earnings per share (EPS) at multiples of nickels documented in Thomas (1989). In addition, this article documents a hitherto unrecorded phenomenon that forecast revisions also exhibit granularity at multiples of nickels and shows that analysts are more likely to make nickel forecast revisions when they lack precise information. Forecasts that revise prior forecasts by multiples of nickels are less accurate.