Analysts' Rationality and Forecast Bias: Evidence from Sales Forecasts

David P Mest and Elizabeth Plummer

Review of Quantitative Finance and Accounting, 2003, vol. 21, issue 2, 103-22

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. Copyright 2003 by Kluwer Academic Publishers

Date: 2003
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