Download or read book Is Analyst Optimism Intentional Additional Evidence on the Existence of Reporting and Selection Bias in Analyst Earnings Forecasts written by Irene Karamanou and published by . This book was released on 2001 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt: The paper examines whether the documented bias in analyst earnings forecasts is intentional by investigating whether analysts account for the market's ability to adjust for the bias when forming their forecasts. The procedure follows three steps. First, I estimate on a firm-specific basis the forecast error for each firm decomposed in its two parts, bias and underreaction. I then employ an ERC model for each firm modified to include the expected bias and underreaction from step 1. The coefficient on the expected bias variable serves as the proxy for the market's ability to adjust for the bias. Finally I include this proxy in a cross-sectional regression explaining analyst forecast error. Finding a relationship between bias and the proxy for the market's ability to adjust for the bias will provide evidence on the joint hypothesis that (a) analysts know what the ability of the market to undo the bias for a firm is and (b) they form or issue their forecasts accordingly. A positive relationship is consistent with the existence of both reporting and selection bias. A negative relationship is consistent with the existence of reporting bias. I find that analysts reduce the bias in their announced forecasts as the market's ability to adjust for the bias increases. This result provides direct evidence that analysts knowingly bias their forecasts. The negative relationship between the market's ability to adjust for the bias and the level of bias in the forecasts provides support for the existence of reporting bias in particular. Controlling for the sign of bias (optimistic vs. pessimistic) shows that optimistic bias is intentional. Even though I do not find evidence that pessimistic bias is intentional this may be due to the structural design of the tests. Finally, even though I find that the market seems to adjust for analyst underreaction, I do not find evidence that analyst underreaction is intentional.

Download or read book Managerial Behavior and the Bias in Analysts Earnings Forecasts written by Lawrence D. Brown and published by . This book was released on 2014 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Managerial behavior differs considerably when managers report quarterly profits versus losses. When they report profits, managers seek to just meet or slightly beat analyst estimates. When they report losses, managers do not attempt to meet or slightly beat analyst estimates. Instead, managers often do not forewarn analysts of impending losses, and the analyst's signed error is likely to be negative and extreme (i.e., a measured optimistic bias). Brown (1997 Financial Analysts Journal) shows that the optimistic bias in analyst earnings forecasts has been mitigated over time, and that it is less pronounced for larger firms and firms followed by many analysts. In the present study, I offer three explanations for these temporal and cross-sectional phenomena. First, the frequency of profits versus losses may differ temporally and/or cross-sectionally. Since an optimistic bias in analyst forecasts is less likely to occur when firms report profits, an optimistic bias is less likely to be observed in samples possessing a relatively greater frequency of profits. Second, the tendency to report profits that just meet or slightly beat analyst estimates may differ temporally and/or cross-sectionally. A greater tendency to 'manage profits' (and analyst estimates) in this manner reduces the measured optimistic bias in analyst forecasts. Third, the tendency to forewarn analysts of impending losses may differ temporally and/or cross-sectionally. A greater tendency to 'manage losses' in this manner also reduces the measured optimistic bias in analyst forecasts. I provide the following temporal evidence. The optimistic bias in analyst forecasts pertains to both the entire sample and the losses sub-sample. In contrast, a pessimistic bias exists for the 85.3% of the sample that consists of reported profits. The temporal decrease in the optimistic bias documented by Brown (1997) pertains to both losses and profits. Analysts have gotten better at predicting the sign of a loss (i.e., they are much more likely to predict that a loss will occur than they used to), and they have reduced the number of extreme negative errors they make by two-thirds. Managers are much more likely to report profits that exactly meet or slightly beat analyst estimates than they used to. In contrast, they are less likely to report profits that fall a little short of analyst estimates than they used to. I conclude that the temporal reduction in optimistic bias is attributable to an increased tendency to manage both profits and losses. I find no evidence that there exists a temporal change in the profits-losses mix (using the I/B/E/S definition of reported quarterly profits and losses). I document the following cross-sectional evidence. The principle reason that larger firms have relatively less optimistic bias is that they are far less likely to report losses. A secondary reason that larger firms have relatively less optimistic bias is that their managers are relatively more likely to report profits that slightly beat analyst estimates. The principle reason that firms followed by more analysts have relatively less optimistic bias is that they are far less likely to report losses. A secondary reason that firms followed by more analysts have relatively less optimistic bias is that their managers are relatively more likely to report profits that exactly meet analyst estimates or beat them by one penny. I find no evidence that managers of larger firms or firms followed by more analysts are relatively more likely to forewarn analysts of impending losses. I conclude that cross-sectional differences in bias arise primarily from differential 'loss frequencies,' and secondarily from differential 'profits management.' The paper discusses implications of the results for studies of analysts forecast bias, earnings management, and capital markets. It concludes with caveats and directions for future research.

Download or read book Biased Forecasts or Biased Earnings The Role of Reported Earnings in Explaining Apparent Bias and Over Underreaction in Analysts Earnings Forecasts written by Jeffery S. Abarbanell and published by . This book was released on 2012 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: We demonstrate the role of three empirical properties of cross-sectional distributions of analysts' forecast errors in generating evidence pertinent to three important and heretofore separately analyzed phenomena studied in the analyst earnings forecast literature: purported bias (intentional or unintentional) in analysts' earnings forecasts, forecaster over/underreaction to information in prior realizations of economic variables, and positive serial correlation in analysts' forecast errors. The empirical properties of interest include: the existence of two statistically influential asymmetries found in the tail and the middle of typical forecast error distributions, the fact that a relatively small number of observations comprise these asymmetries and, the unusual character of the reported earnings benchmark used in the calculation of the forecast errors that fall into the two asymmetries that is associated with firm recognition of unexpected accruals. We discuss competing explanations for the presence of these properties of forecast error distributions and their implications for conclusions about analyst forecast rationality that are pertinent to researchers, regulators, and investors concerned with the incentives and judgments of analysts.Previously titled quot;Biased Forecasts or Biased Earnings? The Role of Earnings Management in Explaining Apparent Optimism and Inefficiency in Analysts' Earnings Forecastsquot.

Download or read book Dissertation Abstracts International written by and published by . This book was released on 2001 with total page 612 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book A Theory of Analysts Forecast Bias written by Murugappa (Murgie) Krishnan and published by . This book was released on 1998 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper, we provide an equilibrium explanation for the observed optimism in analysts' earnings forecasts. Our analysis provides theoretical support to the widely held notion that analysts engage in earnings optimism to gain access to management's private information. We show that a strategic analyst, who is motivated by improving the combined accuracy of his forecasts, issues a biased initial forecast to extract information from management, but issues unbiased forecasts subsequently. The management, on the other hand, provides more access because this optimistic bias reduces the proprietary costs associated with disclosure at the margin. An important element of our model is the assumption that analysts also have private information relevant to assessing firm value. Despite rational expectations about analyst bias, analysts' private information cannot be fully unravelled by other agents due to the noise introduced by the diversity in analysts' incentives.

Download or read book Analysts Incentives and Systematic Forecast Bias written by Senyo Y. Tse and published by . This book was released on 2008 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: The likelihood that earnings announcements meet or beat analyst expectations differs substantially and systematically across firms. Prior research explores managers incentives to meet analyst expectations. In this paper, we examine analysts incentives to issue systematically biased earnings forecasts and thereby influence the likelihood that firms report good earnings news. We first document that forecast biases are systematically different, as large firms and firms with low forecast dispersion - labeled high-information firms - are more likely to report positive earning surprises, while small firms and firms with large forecast dispersion - labeled low-information firms - tend to have optimistically biased forecasts that often lead to negative earnings surprises. We also show that potential financing needs induce more optimistic forecasts for low-information firms, but this effect is greatly mitigated for high-information firms. We find that career concerns help explain analysts' systematic forecast bias. An analyst's career longevity is enhanced by issuing pessimistic forecasts for high-information firms and optimistic forecasts for low-information firms. Optimistic forecast bias for high-financing-need firms has no consequence for an analyst's career longevity, but optimistic bias for low-financing-need firms hurts. Our results suggest that career concerns contribute to a systematic pattern of forecasting that aligns with managerial preferences.

Download or read book Extrapolation Bias in Explaining the Asset Growth Anomaly written by Hyungjin Cho and published by . This book was released on 2015 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: Using analysts' multi-period earnings forecasts, this paper investigates whether analyst forecast errors are related to asset growth and, if so, to what extent analysts' optimism for high-growth firms can explain the asset growth anomaly. We find that analyst forecasts are more optimistic for firms with high asset growth, particularly for longer-term forecasts (e.g., two- and three-year-ahead forecasts than one-year-ahead forecasts). We also find that analysts' optimism for high-growth firms is more pronounced for (1) firms that have maintained similar levels of growth in recent periods, (2) firms with higher information uncertainty, and (3) forecasts with longer forecast horizons (e.g., forecasts issued far before fiscal year end). Adding forecast errors to a growth-return regression substantially reduces the coefficient on asset growth, suggesting an important role of forecast errors in the growth anomaly. Path analysis suggests that analysts' long-term forecast errors, but not short-term forecast errors, are important mediators through which biased expectations about asset growth are incorporated into stock returns. Overall, our findings support the extrapolation bias explanation for the asset growth anomaly.

Download or read book Earnings Predictability and Bias in Analysts Earnings Forecasts written by Somnath Das and published by . This book was released on 2008 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines cross-sectional differences in the optimistic behavior of financial analysts. Specifically, we investigate whether the predictive accuracy of past information (e.g., time-series of earnings, past returns, etc.) is associated with the magnitude of the bias in analysts' earnings forecasts. We posit that there is higher demand for non-public information for firms whose earnings are difficult to accurately predict than for firms whose earnings can be accurately forecasted using public information. Assuming that optimism facilitates access to management's non-public information, we hypothesize that analysts will issue more optimistic forecasts for low predictability firms than for high predictability firms. Our results support this hypothesis.

Download or read book Analyst Forecasting Errors written by Lawrence D. Brown and published by . This book was released on 2014 with total page 8 pages. Available in PDF, EPUB and Kindle. Book excerpt: Analyst forecasting errors are approximately as large as Dreman and Berry (1995) documented, and an optimistic bias is evident for all years from 1985 through 7996. In contrast to their findings, I show that analyst forecasting errors and bias have decreased over lime. Moreover, the optimistic bias in quarterly forecasts was absent for Samp;P 500 firms from 1993 through 1996. Analyst forecasting errors are smaller for (1) Samp;P 500 finns than for other firms; (2) firms with comparatively large amounts of market capitalization, absolute value of earnings forecast, and analyst following; and (3) firms in certain industries.

Download or read book Analyst Disagreement Forecast Bias and Stock Returns written by Anna Scherbina and published by . This book was released on 2004 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: I present evidence of inefficient information processing in equity markets by documenting that biases in analysts' earnings forecasts are reflected in stock prices. In particular, I show that investors fail to fully account for optimistic bias associated with analyst disagreement. This bias arises for two reasons. First, analysts issue more optimistic forecasts when earnings are uncertain. Second, analysts with sufficiently low earnings expectations who choose to keep quiet introduce an optimistic bias in the mean reported forecast that is increasing in the underlying disagreement. Indicators of the missing negative opinions predict earnings surprises and stock returns. By selling stocks with high analyst disagreement institutions exert correcting pressure on prices.

Download or read book American Doctoral Dissertations written by and published by . This book was released on 2000 with total page 816 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Is Cognitive Bias Really Present in Analyst Forecasts The Role of Investor Sentiment written by Pilar Corredor and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper analyses four key markets within the European context. In this context, where the level of analyst coverage is lower than in the US setting, we aim to ascertain whether the origin of optimism in analyst forecasts in these markets is mainly strategic or whether it also contains an element of cognitive bias. Despite the fact that forecast errors lack the explanatory power to account for a significant percentage of the relationship between market sentiment and future stock returns, our new tests based on selection bias (SB1 and SB2), in conjunction with an analysis of abnormal trading volume, confirm the presence of both cognitive bias and strategic behaviour in analyst forecasts. This shows that, although regulation can reduce analyst optimism bias, the benefits are constrained by the fact that optimism bias is partly associated with cognitive bias.

Download or read book An Empirical Investigation of Bias in Analysts Earnings Forecasts written by Hakan Saraoglu and published by . This book was released on 1996 with total page 318 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Incentives Or Irrationality International Evidence from the Impact of Individualism on Analyst Forecast Bias written by Claudia Qi and published by . This book was released on 2014 with total page 45 pages. Available in PDF, EPUB and Kindle. Book excerpt: Based on a unique dataset that identifies the locations of 19,832 financial analysts covering 21,885 firms from 49 countries during 1996-2013, we find that individualism of analysts' country of residence is negatively associated with their earnings forecast optimism and positively associated with their forecast accuracy. Using multiple proxies for economic incentives and cognitive biases, we find that individualism affects analyst forecast optimism and accuracy through the economic incentives that analysts face, rather than their cognitive biases (irrationality). Our results highlight the importance for regulators and investors to factor in culture values when battling against biased analyst research.

Download or read book Share Pledging and Bias in Analyst Earnings Forecasts written by 徐悠 and published by . This book was released on 2020 with total page 73 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Political Cycles and Analyst Bias written by Jeffrey Pittman and published by . This book was released on 2018 with total page 61 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine the role that political-economic factors play in shaping financial analyst bias using a series of scheduled provincial elections in China. Theory on political business cycles holds that, in a short period prior to these political events, provincial politicians have stronger incentives to bias analyst opinions toward optimism. Consistent with this intuition, we document that analysts are significantly more likely to issue favorable recommendations or revise their recommendations upward during political event periods. In cross-sectional evidence consistent with expectations, we find that the relation between political events and analyst optimism is more pronounced for analysts: covering local state-controlled companies, working for brokerage firms affiliated with local politicians, covering companies in provinces with more potential investment banking business, and working for brokerage firms with less valuable reputations to protect. Supporting that foreign analysts are more immune to local political forces, we find that their recommendations do not become more optimistically biased during political event periods. Analyzing stock returns upon and subsequent to the release of favorable recommendations issued during political event periods reveal that investors perceive such recommendations as less credible, although they fail to fully discount their information value. Reinforcing our main evidence, we also find that financial analysts are more likely to issue optimistic earnings forecasts during political event periods. Collectively, our research implies that politicians successfully distort analyst incentives for political purposes.

Download or read book The Effect of Issuing Biased Earnings Forecasts on Analysts Access to Management and Survival written by Bin Ke and published by . This book was released on 2006 with total page 63 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study offers evidence on the earnings forecast bias analysts use to please firm management and the associated benefits they obtain from issuing such biased forecasts in the years prior to Regulation Fair Disclosure. Analysts who issue initial optimistic earnings forecasts followed by pessimistic earnings forecasts before the earnings announcement produce more accurate earnings forecasts and are less likely to be fired by their employers. The effect of such biased earnings forecasts on forecast accuracy and firing is stronger for analysts who follow firms with heavy insider selling and hard-to-predict earnings. The above results hold regardless of whether a brokerage firm has investment banking business or not. These results are consistent with the hypothesis that analysts use biased earnings forecasts to curry favor with firm management in order to obtain better access to management's private information.