Understanding the Biases in Analyst Forecasts

Abstract

Researchers have examined the relation between expected growth and analyst forecast bias and found mixed evidence, in that forecast bias differs significantly between high-growth and low-growth firms when the P/B ratio is used to measure expected growth, but not when the P/E ratio is used in this capacity. In this paper, I use P/B and P/E ratios jointly to more precisely investigate the relation of expected growth with forecast errors. I observe that the relation between P/E and forecast errors depends on the P/B level, explaining the low overall relation between P/E and forecast errors found in previous studies.

Keywords: price-to-book ratio, price-to-earnings ratio, analyst forecasts

JEL Classification: G29, G12, M41