The Lure of the Slant and the Banality of the Conservative

Abstract

Forecast bias is associated with lower short-term returns. However, bias is not equivalent to optimism when information-biased analysts exhibit processing errors. Late-tenure and early-forecasting analysts are incentivized to be strategically optimistic. Using the timing variables for identification, this paper finds that for upward revisions, a 1% increase in analyst optimism results in a 12 basis-point greater two-day return. Under normal conditions, the overpriced (underpriced) stocks covered by late-tenure (early-tenure) analysts do (do not) experience a price correction; the under-reaction engenders an analyst-optimism portfolio alpha of 62 basis points per month. The findings suggest that asset prices increase with strategic optimism.