This paper examines whether managers communicate with analysts to disseminate biased information to increase managers compensation. We focus on managers stock option compensation, a setting where managerial incentive to engage in an opportunistic behavior is particularly severe. Meanwhile, we examine whether analysts improve their relative forecast accuracy in the next quarter after issuing biased recommendation to please management. Using option grants sample and option exercises sample over 1996-2005 separately, we find that managers with option grants (option exercises) receive relative unfavorable (favorable) analyst consensus recommendation for each of three months prior to the award month (exercise month). Moreover, individual analysts who issue unfavorable recommendation prior to option awards or favorable recommendation prior to option exercises to increase managers’ compensation improve their relative forecast accuracy in the next quarter. These findings support the argument that the communication exists between managers and financial analysts for their own incentives and benefits.

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