Investor sentiment and management earnings forecast bias

Helen Hurwitz

Journal of Business Finance & Accounting, 2018, vol. 45, issue 1-2, 166-183

Abstract: This study investigates whether investor sentiment is associated with behavioral bias in managers’ annual earnings forecasts that are generally issued early in the year when uncertainty is relatively high. I provide evidence that management earnings forecast optimism increases with investor sentiment. Furthermore, I find that managers’ annual earnings forecasts are more pessimistic during low†sentiment periods than during normal†sentiment periods. Since managers lack incentives to further deflate stock prices during a low†sentiment period, this evidence indicates that sentiment†related management earnings forecast bias is likely to be unintentional. In addition, I find that the relationship between management earnings forecast bias and investor sentiment is stronger for firms with higher uncertainty, consistent with investor sentiment having a greater influence on management earnings forecasts when uncertainty is higher.

Date: 2018
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