Analysts' Rationality and Forecast Bias: Evidence from Sales Forecasts

Analysts' Rationality and Forecast Bias: Evidence from Sales Forecasts When optimistic forecasts can improve access to management, rational analysts have incentives to issue optimistically-biased forecasts (Lim, 2001). This paper proposes that the extent of this optimistic forecast bias will depend on the forecast's importance to management. If management attaches less importance to a forecasted measure, analysts should decrease their forecast bias because the expected benefits of issuing optimistic forecasts are less. We examine analysts' earnings and sales forecasts, and predict that analysts' optimistic bias will be greater for earnings than for sales. Results are consistent with our predictions and contribute to the evidence that analysts' forecast bias is rational and intentional. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Analysts' Rationality and Forecast Bias: Evidence from Sales Forecasts

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Publisher
Springer Journals
Copyright
Copyright © 2003 by Kluwer Academic Publishers
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1023/A:1024841531461
Publisher site
See Article on Publisher Site

Abstract

When optimistic forecasts can improve access to management, rational analysts have incentives to issue optimistically-biased forecasts (Lim, 2001). This paper proposes that the extent of this optimistic forecast bias will depend on the forecast's importance to management. If management attaches less importance to a forecasted measure, analysts should decrease their forecast bias because the expected benefits of issuing optimistic forecasts are less. We examine analysts' earnings and sales forecasts, and predict that analysts' optimistic bias will be greater for earnings than for sales. Results are consistent with our predictions and contribute to the evidence that analysts' forecast bias is rational and intentional.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Oct 4, 2004

References

  • Tests of Analysts' Overreaction/Underreaction to Earnings Information as an Explanation for Anomalous Stock Price Behavior
    Abarbanell, J. S.; Bernard, V. L.

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