An explanation for unintentional optimism in analysts' earnings forecasts

Accounting Review

Volumn 77, Issue 4, 2002, Pages 731-753

  Sedor, Lisa M ^a  

^a UNIVERSITY OF NOTRE DAME   (United States)

Author keywords

Analysts' forecasts; Forecast optimism; Scenario thinking

Indexed keywords

EID: 0036808354     PISSN: 00014826     EISSN: None     Source Type: Journal    
DOI: 10.2308/accr.2002.77.4.731     Document Type: Article

References (85)

1. Abarbanell, J.S., and V.L. Bernard. 1992. Tests of analysts' overreaction/underreaction to earnings information as an explanation for anomalous stock price behavior. The Journal of Finance 67 (3): 1181-1207.
2. _, and R. Lehavy. 2000. Biased forecasts or biased earnings? The role of earnings management in explaining apparent optimism and inefficiency in analysts' earnings forecasts. Working paper, The University of North Carolina at Chapel Hill and University of California, Berkeley.
3. Ackert, L.E., and G. Athanassakos. 1997. Prior uncertainty, analyst bias, and subsequent abnormal returns. The Journal of Financial Research 20 (2): 263-273.
4. Affleck-Graves, J., L.R. Davis, and R.R. Mendenhall. 1990. Forecasts of earnings per share: Possible sources of analyst superiority and bias. Contemporary Accounting Research 6 (2): 501-517.
5. Ali, A., A. Klein, and J. Rosenfeld. 1992. Analysts' use of information about permanent and transitory earnings components in forecasting annual EPS. The Accounting Review 67 (1): 183-198.
6. Arkes, H.R. 1991. Costs and benefits of judgment errors: Implications for debiasing. Psychological Bulletin 110 (3): 486-498.
7. Baron, R.M., and D.A. Kenny. 1986. The moderator-mediator variable distinction in social psychological research: Conceptual, strategic, and statistical considerations. Journal of Personality and Social Psychology 51 (6): 1173-1182.
8. Baumeister, R.F., and L.S. Newman. 1994. How stories make sense of personal experiences: Motives that shape autobiographical narratives. Personality and Social Psychology Bulletin 20 (6): 676-690.
9. Brown, L.D. 1993. Earnings forecasting research: Its implications for capital markets research. International Journal of Forecasting 9: 295-320.
10. _. 1997. Analyst forecasting errors: Additional evidence. Financial Analysts Journal (November/ December): 81-88.
11. _. 2001. A temporal analysis of earnings surprises: Profits versus losses. Journal of Accounting Research 39 (2): 221-241.
12. Buckless, F.A., and S.P. Ravenscroft. 1990. Contrast coding: A refinement of ANOVA in behavioral analysis. The Accounting Review 65 (4): 933-945.
13. Butler, K.C., and H. Saraoglu. 1999. Improving analysts' negative earnings forecasts. Financial Analysts Journal (May/June): 48-56.
14. Clement, M.B. 1999. Analyst forecast accuracy: Do ability, resources, and portfolio complexity matter? Journal of Accounting and Economics 27: 285-303.
15. Darrough, M.N., and T. Russell. 2002. A positive model of earnings forecasts: Top down versus bottom up. Journal of Business 75 (1): 127-152.
16. Dawes, R.M. 1988. Rational Choice in an Uncertain World. Orlando, FL: Harcourt Brace Jovanovich.
17. DeBondt, W.F.M., and R.H. Thaler. 1990. Stock market volatility: Do security analysts overreact? American Economic Review 80 (2): 52-57.
18. Dechow, P.M., A.P. Hutton, and R.G. Sloan. 2000. The relation between analysts' forecasts of long-term earnings growth and stock price performance following equity offerings. Contemporary Accounting Research 17 (1): 1-32.
19. Dowen, R.J. 1996. Analyst reaction to negative earnings for large well-known firms. The Journal of Portfolio Management 23 (1): 49-55.
20. Dugar, A., and S. Nathan. 1995. The effect of investment banking relationships on financial analysts' earnings forecasts and investment recommendations. Contemporary Accounting Research 12 (1): 131-160.
21. Duru, A., and D.M. Reeb. 2002. International diversification and analysts' forecast accuracy and bias. The Accounting Review 77 (2): 415-433.
22. Eames, M., S.M. Glover, and J. Kennedy. 2002. The association between trading recommendations and broker-analysts' earnings forecasts. Journal of Accounting Research 40 (1): 85-104.
23. Easterwood, J.C., and S.R. Nutt. 1999. Inefficiency in analysts' earnings forecasts: Systematic misreaction or systematic optimism? The Journal of Finance 54 (5): 1777-1797.
24. Elgers, P.T., and M.H. Lo. 1994. Reductions in analysts' annual earnings forecast errors using information in prior earnings and security returns. Journal of Accounting Research 32 (2): 290-303.
25. Epstein, M.J., and K.G. Palepu. 1999. What financial analysts want. Strategic Finance 80 (10): 48-52.
26. Fox, J. 1997. Learn to play the earnings game (and Wall Street will love you). Fortune (March 31): 76.
27. Francis, J., and D. Philbrick. 1993. Analysts' decisions as products of a multi-task environment. Journal of Accounting Research 31 (2): 216-230.
28. _, J.D. Hanna, and D.R. Philbrick. 1997. Management communications with securities analysts. Journal of Accounting and Economics 24 (3): 363-394.
29. Frederick, D.M. 1991. Auditors' representation and retrieval of internal control knowledge. The Accounting Review 66 (2): 240-258.
30. Goodwin, P., and G. Wright. 1994. Heuristics, biases and improvement strategies in judgmental time series forecasting. Omega, International Journal of Management Science 22 (6): 553-568.
31. Hayn, C. 1995. The information content of losses. Journal of Accounting and Economics 20 (2): 125-153.
32. Heiman, V.B. 1990. Auditors' assessments of the likelihood of error explanations in analytical review. The Accounting Review 65 (4): 875-890.
33. Hendrickx, L., C. Vlek, and H. Oppewal. 1989. Relative importance of scenario information and frequency information in the judgment of risk. Acta Psychologica 72: 41-63.
34. _, _, and H. Caljé. 1992. Effects of frequency and scenario information on the evaluation of large-scale risks. Organizational Behavior and Human Decision Processes 52: 256-275.
35. Hoch, S.J. 1984. Availability and interference in predictive judgment. Journal of Experimental Psychology: Learning, Memory, and Cognition 10 (4): 649-662.
36. Hong, H.G., and J.D. Kubik. Analyzing the analysts: Career concerns and biased earnings forecasts. The Journal of Finance (forthcoming).
37. Huberts, L.C., and R.J. Fuller. 1995. Predictability bias in the U.S. equity market. Financial Analysts Journal (March/April): 12-28.
38. Hunton, J.E., and R.A. McEwen. 1997. An assessment of the relation between analysts' earnings forecast accuracy, motivational incentives, and cognitive information search strategy. The Accounting Review 72 (4): 497-515.
39. Hwang, L., C. Jan, and S. Basu. 1996. Loss firms and analysts' earnings forecast errors. The Journal of Financial Statement Analysis (Winter): 18-30.
40. Irvine, P., S. Nathan, and P. Simko. 1998. The relation between securities firms' mutual fund equity holdings and their analysts' earnings forecasts. Working paper, Emory University, Georgia State University, and Emory University.
41. Jacob, J., T.Z. Lys, and M.A. Neale. 1999. Expertise in forecasting performance of security analysts. Journal of Accounting and Economics 28: 51-82.
42. Jan, C., and J.A. Ou. 1995. The role of negative earnings in the valuation of equity stocks. Working paper, New York University and Santa Clara University.
43. Jungermann, H. 1985. Inferential processes in the construction of scenarios. Journal of Forecasting 4: 321-327.
44. Kahn, R.N., and A. Rudd. 1999. Modeling analyst behavior. The Journal of Investing 8 (2): 7-14.
45. Kahneman, D., and A. Tversky. 1982. The simulation heuristic. In Judgment Under Uncertainty: Heuristics and Biases, edited by D. Kalmeman, P. Slovic, and A. Tversky. Cambridge, U.K.: Cambridge University Press.
46. _, and D. Lovallo. 1993. Timid choices and bold forecasts: A cognitive perspective on risk taking. Management Science 39 (1): 17-31.
47. Kennedy, J. 1995. Debiasing the curse of knowledge in audit judgment. The Accounting Review 70 (2): 249-273.
48. Kim, C., and S. Lustgarten. 1998. Broker-analysts' trade-boosting incentive and their earnings forecast bias. Working paper, Queens College of The City University of New York and Baruch College of The City University of New York.
49. Klein, A. 1990. A direct test of the cognitive bias theory of share price reversals. Journal of Accounting and Economics 13: 155-166.
50. Koehler, D.J. 1991. Explanation, imagination, and confidence in judgment. Psychological Bulletin 110 (3): 499-519.
51. Koonce, L. 1992. Explanation and counterexplanation during audit analytical review. The Accounting Review 67 (1): 59-76.
52. Krishnan, M., and K. Sivaramakrishnan. 1998. A theory of analyst forecast bias. Working paper, Rutgers, the State University of New Jersey, and Texas A&M University.
53. Kuhn, K.M., and J.A. Sniezek. 1996. Confidence and uncertainty in judgmental forecasting: Differential effects of scenario presentation. Journal of Behavioral Decision Making 9: 231-247.
54. Levi, A.S., and J.B. Pryor. 1987. Use of the availability heuristic in probability estimates of future events: The effects of imagining outcomes versus imagining reasons. Organizational Behavior and Human Decision Processes 40: 219-234.
55. Libby, R., R. Bloomfield, and M.W. Nelson. 2001. Experimental research in financial accounting. Accounting, Organizations and Society (forthcoming).
56. Lim, T. 2001. Rationality and analysts' forecast bias. The Journal of Finance 56 (1): 369-385.
57. Lin, H., and M.F. McNichols. 1998. Underwriting relationships, analysts' earnings forecasts and investment recommendations. Journal of Accounting and Economics 25: 101-127.
58. Matsumoto, D.A. 2002. Management's incentive to avoid negative earnings surprises. The Accounting Review 77 (3): 483-514.
59. Maxwell, S.E., and H.D. Delaney. 1990. Designing Experiments and Analyzing Data: A Model Comparison Perspective. Pacific Grove, CA: Brooks/Cole.
60. McEwen, R.A., and J.E. Hunton. 1999. Is analyst forecast accuracy associated with accounting information use? Accounting Horizons 13 (1): 1-16.
61. McGregor, I., and J.G. Holmes. 1999. How storytelling shapes memory and impressions of relationship events over time. Journal of Personality and Social Psychology 76 (3): 403-419.
62. McNichols, M., and P.C. O'Brien. 1997. Self-selection and analyst coverage. Journal of Accounting Research 35 (Supplement): 167-199.
63. Michaely, R., and K.L. Womack. 1999. Conflict of interest and the credibility of underwriter analyst recommendations. The Review of Financial Studies 12 (4): 653-686.
64. Mikhail, M.B., B.R. Walther, and R.H. Willis. 1997. Do security analysts improve their performance with experience? Journal of Accounting Research 35 (Supplement): 131-157.
65. _, and _. 1999. Does forecast accuracy matter to security analysts? The Accounting Review 74 (2): 185-200.
66. O'Connor, M., and M. Lawrence. 1998. Judgmental forecasting and the use of available information. In Forecasting with Judgment, edited by G. Wright, and P. Goodwin. West Sussex, U.K.: John Wiley & Sons.
67. Pennington, N., and R. Hastie. 1986. Evidence evaluation in complex decision making. Journal of Personality and Social Psychology 51 (2): 242-258.
68. _, and _. 1988. Explanation-based decision making: Effects of memory structure on judg ment. Journal of Experimental Psychology: Learning, Memory, and Cognition 14 (3): 521-533.
69. _, and _. 1993. The story model for juror decision making. In Inside the Juror: The Psychology of Juror Decision Making, edited by R. Hastie. Cambridge, U.K.: Cambridge University Press.
70. Previts, G.J., R.J. Bricker, T.R. Robinson, and S.J. Young. 1994. A content analysis of sell-side financial analyst company reports. Accounting Horizons 8 (2): 55-70.
71. Rajan, R., and H. Servaes. 1997. Analyst following of initial public offerings. The Journal of Finance 52 (2): 507-529.
72. Ricchiute, D.N. 1992. Working-paper order effects and auditors' going-concern decisions. The Accounting Review 67 (1): 46-58.
73. Richardson, S., S.H. Teoh, and P. Wysocki. 2002. The walkdown to beatable analyst forecasts: The role of equity issuance and insider trading incentives. Working paper, University of Michigan, The Ohio State University, and Massachusetts Institute of Technology.
74. Rosenthal, R., and R.L. Rosnow. 1985. Contrast Analysis: Focused Comparisons in the Analysis of Variance. Cambridge, U.K.: Cambridge University Press.
75. Rosnow, R.L., and R. Rosenthal. 1995. "Some things you learn aren't so": Cohen's paradox, Asch's paradigm, and the interpretation of interaction. Psychological Science 6 (1): 3-9.
76. Schipper, K. 1991. Commentary on analysts' forecasts. Accounting Horizons 5 (December): 105-121.
77. Schnaars, S.P. 1987. How to develop and use scenarios. Long Range Planning 20 (1): 105-114.
78. Schoemaker, P.J.H. 1991. When and how to use scenario planning: A heuristic approach with illustration. Journal of Forecasting 10: 549-564.
79. _. 1993. Multiple scenario development: Its conceptual and behavioral foundation. Strategic Management Journal 14: 193-213.
80. Siegel, S., and N.J. Castellan, Jr. 1988. Nonparametric Statistics for the Behavioral Sciences. New York, NY: McGraw-Hill.
81. Stickel, S.E. 1992. Reputation and performance among security analysts. The Journal of Finance 47 (5): 1811-1836.
82. Tasker, S. 1998. Bridging the information gap: Quarterly conference calls as a medium for voluntary disclosure. Review of Accounting Studies 3 (1-2): 137-167.
83. Trabasso, T., and L.L. Sperry. 1985. Causal relatedness and importance of story events. Journal of Memory and Language 24: 595-611.
84. Tversky, A., and D. Kahneman. 1973. Availability: A heuristic for judging frequency and probability. Cognitive Psychology 5: 207-232.
85. Webby, R., and M. O'Connor. 1996. Judgemental and statistical time series forecasting: A review of the literature. International Journal of Forecasting 12:91-118.