Earnings Predictability And Broker-Analysts’ Earnings Forecast Bias

Abstract

Scholars have reasoned that analysts issue optimistic forecasts to improve their access to managers’ private information when earnings are unpredictable. While this requires a managerial preference for analyst forecast optimism, the observed walk-down of analyst expectations to beatable forecasts is consistent with a managerial preference for pessimism in short-horizon forecasts. Using data from various sample periods, alternative model specifications, and various measures of earnings unpredictability, we find that pessimism, not optimism, in short-horizon forecasts is associated with increasingly unpredictable earnings. Our results suggest that firms can more effectively manage analysts’ earnings expectations downward when earnings are relatively unpredictable. and earnings forecasts (Altınkılıç, Balashov & Hansen 2013) on recent news and events.