Overprecise forecasts

Yi Dong, Xuejiao Liu (), Gerald J. Lobo and Chenkai Ni ()
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Yi Dong: Shanghai University of Finance and Economics
Xuejiao Liu: University of International Business and Economics
Gerald J. Lobo: University of Houston
Chenkai Ni: Fudan University

Review of Accounting Studies, 2024, vol. 29, issue 1, No 8, 276-326

Abstract: Abstract We examine the properties of overprecise forecasts, i.e., forecasts with more digits after the decimal than the mode of forecasts issued by all analysts following a given firm in a given year. Contrary to conventional wisdom, we find that overprecise forecasts are less accurate than peer forecasts. The lower accuracy is related to inexperienced analysts, who tend to overweight their models and produce more specific, yet less accurate forecasts. Additional analyses indicate that analysts issue fewer overprecise forecasts as they gain experience and that experience mitigates the negative association between forecast overprecision and forecast accuracy. Forecast overprecision is also positively associated with forecast boldness and brokerage house prestige, two proxies for analyst overconfidence in their model outputs. We further document that the capital market partially sees through this inaccuracy, as stock prices react less to overprecise forecast revisions. By revealing a novel behavioral bias of sell-side analysts, our study challenges the view that form precision signals greater accuracy and informativeness.

Keywords: Overprecision; Analyst forecasts; Forecast accuracy; Behavioral bias (search for similar items in EconPapers)
JEL-codes: G40 M40 M41 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11142-022-09724-x

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