Economics at your fingertips  

Analysts’ forecast optimism: The effects of managers’ incentives on analysts’ forecasts

Anna Bergman Brown, Guoyu Lin and Aner Zhou

Journal of Behavioral and Experimental Finance, 2022, vol. 35, issue C

Abstract: Sell-side analysts are rewarded for forecasting accurately, yet prior literature shows that analysts’ earnings forecasts exhibit an optimistic bias, which is generally attributed to analysts’ compensation structure or a desire to extract private information from managers. Building upon the theoretical model from Beyer (2008), we propose that analysts make decisions about forecasting while considering both optimism and accuracy: analysts forecast optimistically in anticipation of managers’ upward manipulation of earnings in order to meet or beat forecasts. We find that the upward bias in analysts’ earnings forecasts is increasing in the cost of managers missing forecasts (measured using leverage) and the volatility of earnings (using the standard deviation of ROA), and decreasing in the cost of earnings management (measured using Big 4 auditor, a pre- vs. post-Sarbanes Oxley test, and a DID test of larger vs. smaller firms, pre- vs. post-Sarbanes Oxley Section 404 implementation). Further tests suggest that these results are attributable to a lower (higher) incidence of earnings management for Big 4 and post-Sarbanes Oxley firms (firms with higher leverage and more volatile earnings). Our results provide evidence of a rational explanation for analysts’ decision making that considers both forecast optimism and a strategy to forecast accurately.

Keywords: Analyst forecast optimism; Earnings management; Managerial reporting incentives (search for similar items in EconPapers)
JEL-codes: G14 G29 M40 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

DOI: 10.1016/j.jbef.2022.100708

Access Statistics for this article

Journal of Behavioral and Experimental Finance is currently edited by Michael Dowling and Jürgen Huber

More articles in Journal of Behavioral and Experimental Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

Page updated 2022-11-12
Handle: RePEc:eee:beexfi:v:35:y:2022:i:c:s2214635022000508