To Blame or Not to Blame: Analysts' Reactions to External Explanations for Poor Financial Performance

Managers often provide self-serving disclosures that blame poor financial performance on temporary, external factors. Results of an experiment conducted with 124 financial analysts suggest that when analysts perceive such disclosures as plausible, they provide higher earnings forecasts and stock valuations than if the explanation had not been provided. However, we also show that these disclosures can backfire if analysts find them implausible. Specifically, implausible external explanations for poor performance lead analysts to provide lower earnings forecasts and assess a higher cost of capital than if the explanation had not been provided.