Conservatism and Analyst Earnings Forecast Bias

Abstract:     
Prior studies document that, on average, analysts issue optimistic forecasts one year prior to the earnings announcement and revise their forecasts downward as the earnings announcement date approaches. We hypothesize that the initial analyst forecast is biased because analysts do not fully adjust their forecasts for conservatism. Consistent with our hypothesis, we find that the initial analyst forecast error is negatively associated with proxies for conservatism measured before the forecast is issued. That is, on average, analysts do not include in their initial forecasts information about conservatism even though that information is available at the time of the forecasts, contributing to the optimistic analyst forecast bias.

Keywords: Accounting conservatism, analyst forecast error

JEL Classifications: M41, M44, G29

Working Paper Series