Analysts' Conflicts of Interest and Biases in Earnings Forecasts

2007 ◽  
Vol 42 (4) ◽  
pp. 893-913 ◽  
Author(s):  
Louis K. C. Chan ◽  
Jason Karceski ◽  
Josef Lakonishok
Keyword(s):  
Conflicts Of Interest ◽  
Earnings Forecasts ◽  
Investment Banking ◽  
International Markets ◽  
Forecast Revisions ◽  
Bull Market ◽  
Earnings Surprises ◽  
Banking Business ◽  
Growth Stocks

AbstractAnalysts' earnings forecasts are influenced by their desire to win investment banking clients. We hypothesize that the equity bull market of the 1990s, along with the boom in investment banking business, exacerbated analysts' conflicts of interest and their incentives to strategically adjust forecasts to avoid earnings disappointments. We document shifts in the distribution of earnings surprises and related changes in the market's response to surprises and forecast revisions. The evidence for shifts is stronger for growth stocks, where conflicts of interest are more pronounced. However, shifts are less notable for analysts without ties to investment banking and in international markets.

scholarly journals The Role of Anchoring Bias in the Equity Market: Evidence from Analysts’ Earnings Forecasts and Stock Returns

2012 ◽  
Vol 48 (1) ◽  
pp. 47-76 ◽  
Author(s):  
Ling Cen ◽  
Gilles Hilary ◽  
K. C. John Wei
Keyword(s):  
Stock Returns ◽  
Earnings Forecasts ◽  
Equity Market ◽  
Stock Splits ◽  
Forecast Errors ◽  
Forecast Revisions ◽  
Earnings Per Share ◽  
Earnings Surprises ◽  
Anchoring Bias

AbstractWe test the implications of anchoring bias associated with forecast earnings per share (FEPS) for forecast errors, earnings surprises, stock returns, and stock splits. We find that analysts make optimistic (pessimistic) forecasts when a firm’s FEPS is lower (higher) than the industry median. Further, firms with FEPS greater (lower) than the industry median experience abnormally high (low) future stock returns, particularly around subsequent earnings announcement dates. These firms are also more likely to engage in stock splits. Finally, split firms experience more positive forecast revisions, more negative forecast errors, and more negative earnings surprises after stock splits.

Analysts’ Incentives to Overweight Management Guidance When Revising Their Short-Term Earnings Forecasts

2010 ◽  
Vol 85 (5) ◽  
pp. 1617-1646 ◽  
Author(s):  
Mei Feng ◽  
Sarah McVay
Keyword(s):  
Forecast Accuracy ◽  
Earnings Forecasts ◽  
Investment Banking ◽  
Equity Offerings ◽  
Short Term ◽  
Management Guidance ◽  
Banking Business

ABSTRACT: We document that, when revising their short-term earnings forecasts in response to management guidance, analysts wishing to curry favor with management weight the guidance more heavily than predicted, based on the credibility and usefulness of the guidance. This overweighting of guidance is present prior to equity offerings and other events that could lead to investment banking business. Although analysts sacrifice their forecast accuracy by overweighting management guidance, they appear to benefit, on average, by subsequently gaining the underwriting business for their banks. Thus, while analysts wishing to please managers are optimistic in their long-term earnings forecasts, they take their cue from management when determining their short-term earnings forecasts.

NASD Rule 2711 and Changes in Analysts' Independence in Making Stock Recommendations

2009 ◽  
Vol 84 (4) ◽  
pp. 1041-1071 ◽  
Author(s):  
Chih-Ying Chen ◽  
Peter F. Chen
Keyword(s):  
Stock Prices ◽  
Conflicts Of Interest ◽  
Intrinsic Value ◽  
Earnings Forecasts ◽  
Investment Banking ◽  
Stock Recommendations ◽  
Regulatory Reforms

ABSTRACT: This study provides evidence of changes in how analysts generate stock recommendations after the SEC's approval of NASD Rule 2711 in May 2002, which introduced regulatory reforms to enhance the independence of analysts' research. We investigate the relations of analysts' stock recommendations with intrinsic value estimates (based on analysts' earnings forecasts relative to the stock prices, V/P) and with investment-banking-related conflicts of interest during the 1994–2005 period. We find a stronger relation between analysts' stock recommendations and V/P and a weaker relation between analysts' stock recommendations and conflicts of interest in the post-Rule period than prior to the implementation of the Rule. Moreover, the increases in the relation between stock recommendations and V/P after the implementation of the Rule are greater for the stocks recommended by analysts with greater potential conflicts of interest. Our findings suggest that the implementation of Rule 2711 has enhanced analysts' independence.

I/B/E/S Reported Actual EPS and Analysts' Inferred Actual EPS

2012 ◽  
Vol 88 (3) ◽  
pp. 853-880 ◽  
Author(s):  
Lawrence D. Brown ◽  
Stephannie Larocque
Keyword(s):  
Majority Rule ◽  
Forecast Accuracy ◽  
Earnings Forecasts ◽  
Analyst Forecast ◽  
Earnings Forecast ◽  
Sample Period ◽  
Forecast Dispersion ◽  
Forecast Revisions ◽  
Earnings Surprises ◽  
Analyst Earnings

ABSTRACT Users of I/B/E/S data generally act as if I/B/E/S reported actual earnings represent the earnings analysts were forecasting when they issued their earnings estimates. For example, when assessing analyst forecast accuracy, users of I/B/E/S data compare analysts' forecasts of EPS with I/B/E/S reported actual EPS. I/B/E/S states that it calculates actuals using a “majority rule,” indicating that its actuals often do not represent the earnings that all individual analysts were forecasting. We introduce a method for measuring analyst inferred actuals, and we assess how often I/B/E/S actuals do not represent analyst inferred actuals. We find that I/B/E/S reported Q1 actual EPS differs from analyst inferred actual Q1 EPS by at least one penny 39 percent of the time during our sample period, 36.5 percent of the time when only one analyst follows the firm (hence, this consensus forecast is based on the “majority rule”), and 50 percent of the time during the last three years of our sample period. We document two adverse consequences of this phenomenon. First, studies failing to recognize that I/B/E/S EPS actuals often differ from analyst inferred actuals are likely to obtain less accurate analyst earnings forecasts, smaller analyst earnings forecast revisions conditional on earnings surprises, greater analyst forecast dispersion, and smaller market reaction to earnings surprises than do studies adjusting for these differences. Second, studies failing to recognize that I/B/E/S EPS actuals often differ from analyst inferred actuals may make erroneous inferences.

Analyst Conflicts and Research Quality

2012 ◽  
Vol 02 (02) ◽  
pp. 1250010 ◽  
Author(s):  
Anup Agrawal ◽  
Mark A. Chen
Keyword(s):  
Conflicts Of Interest ◽  
Earnings Forecasts ◽  
Research Quality ◽  
Firm Resources ◽  
Forecast Revisions ◽  
Quarterly Earnings ◽  
Earnings Per Share ◽  
Stock Analysts

This paper examines whether the quality of stock analysts' forecasts is related to conflicts of interest from their employers' investment banking (IB) and brokerage businesses. We consider four aspects of forecast quality: accuracy, bias, and revision frequency of quarterly earnings per share (EPS) forecasts and relative optimism in long-term earnings growth (LTG) forecasts. Using a unique dataset that contains the annual revenue breakdown of analysts' employers among IB, brokerage, and other businesses, we uncover two main findings. First, accuracy and bias in quarterly EPS forecasts appear to be unrelated to conflict magnitudes after controlling for forecast age, firm resources, and analyst characteristics. Second, relative optimism in LTG forecasts and the revision frequency of quarterly EPS forecasts are positively related to the importance of brokerage business to analysts' employers. Additional tests suggest that the frequency of quarterly forecast revisions is positively related to analysts' trade generation incentives. Our findings suggest that reputation concerns keep analysts honest with respect to short-term earnings forecasts but not LTG forecasts. In addition, conflicts from brokerage appear to play a more important role in shaping analysts' forecasting behavior than has been previously recognized.

scholarly journals Earnings Expectations during the COVID-19 Crisis*

2020 ◽  
Vol 10 (4) ◽  
pp. 598-617 ◽  
Author(s):  
Augustin Landier ◽  
David Thesmar
Keyword(s):  
Risk Premium ◽  
Earnings Forecasts ◽  
Earnings Expectations ◽  
Forecast Revisions ◽  
Asset Risk ◽  
Equity Values ◽  
Oxford University ◽  
Risk Free Rate ◽  
Published Paper ◽  
Free Rate

Abstract We analyze the dynamics of earnings forecasts and discount rates implicit in valuations during the COVID-19 crisis. Forecasts over 2020 earnings have been progressively reduced by 16%. Longer-run forecasts have reacted much less. We estimate an implicit discount rate going from 8.5% in mid-February to 11% at the end of March and reverting to its initial level in mid-May. Over the period, the unlevered asset risk premium increases by 50bp, the leverage effect also increases by 50bp, while the risk free rate decreases by 100bp. Hence, analysts’ forecast revisions explain all of the decrease in equity values between January 2020 and mid-May 2020. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Analyst Information Processing, Financial Regulation, and Academic Research

2009 ◽  
Vol 84 (4) ◽  
pp. 1073-1083 ◽  
Author(s):  
Mark T. Bradshaw
Keyword(s):  
Information Processing ◽  
Financial Regulation ◽  
Conflicts Of Interest ◽  
Research Question ◽  
Academic Research ◽  
Earnings Forecasts ◽  
Stock Recommendations ◽  
Market Participants ◽  
Regulatory Changes ◽  
Similarities And Differences

ABSTRACT: Changes in regulations governing capital markets always provide a rich setting for archival researchers to examine how such changes affect the behavior of market participants. Barniv et al. (2009; hereafter, BHMT) and Chen and Chen (2009; hereafter CC) examine the impacts of recently enacted regulations aimed at curbing perceived abused by sell-side analysts. There were no less than six significant regulations issued between 2000 and 2003 that affected the activities of analysts. BHMT and CC emphasize different regulations, but both predict that analysts' recommendation will be less biased as a result of the collective regulatory changes. The evidence in both studies is strong and convincing that the association between analysts' earnings forecasts and stock recommendations has changed, consistent with analysts' personal conflicts of interest having less impact on their analyses. However, the attribution of what regulation, if any, effected this change is less clear. Collectively, the similarities and differences in the studies provide a nice setting to understand how different authors approach the same research question.

Do Analysts Say Anything About Earnings Without Revising Their Earnings Forecasts?

2018 ◽  
Vol 94 (2) ◽  
pp. 29-52 ◽  
Author(s):  
Philip G. Berger ◽  
Charles G. Ham ◽  
Zachary R. Kaplan
Keyword(s):  
Earnings Forecasts ◽  
Share Price ◽  
Earnings Forecast ◽  
Forecast Dispersion ◽  
Earnings Announcement ◽  
Forecast Revisions ◽  
Predictable Returns

ABSTRACT Analysts are selective about which forecasts they update and, thus, convey information about current quarter earnings even when not revising the current quarter earnings (CQE) forecast. We find that (1) textual statements, (2) share price target revisions, and (3) future quarter earnings forecast revisions all predict error in the CQE forecast. We document several reasons analysts sometimes omit information from the CQE forecast: to facilitate beatable forecasts by suppressing positive news from the CQE forecast, to herd toward the consensus, and to avoid small forecast revisions. We also show that omitting information from CQE forecasts leads to lower forecast dispersion and predictable returns at the earnings announcement.

Analysts' Motives for Rounding EPS Forecasts

2012 ◽  
Vol 87 (6) ◽  
pp. 1939-1966 ◽  
Author(s):  
Patricia M. Dechow ◽  
Haifeng You
Keyword(s):  
Earnings Announcements ◽  
Investment Banking ◽  
Earnings Response Coefficients ◽  
Economic Significance ◽  
Earnings Response ◽  
Banking Business

ABSTRACT We investigate analysts' motives for rounding annual EPS forecasts (placing a zero or five in the penny location of the forecast). We first show that an intuitive reason for analysts to engage in rounding is in circumstances where the penny digit of the forecast is of less economic significance. By rounding, analysts reveal that their forecasts are not intended to be precise to the penny. We also show that analyst incentives impact the likelihood of rounding. Specifically, we predict that analysts will exert less effort forecasting earnings for firms that generate less brokerage or investment banking business since such firms create less value for the analysts' employers. As a consequence of this reduced effort and attention, the analyst will be more uncertain about the penny digit of the forecast and so will round. Our results are consistent with this prediction. One implication of our findings is that a rounded forecast is a simple and easily observable proxy for a more noisy measure of the market's expectation of earnings. Consistent with this implication, we show that rounded forecasts bias down earnings response coefficients at earnings announcements.

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