Analyst Compensation and Forecast Bias

Abstract:     
In a recent paper, Bernhardt et al. (2004) developed a non-parametric test for bias in forecasts by professional financial analysts that is robust to correlated information amongst analysts and information arrival over the forecasting cycle. The tests show that analysts anti-herd: Analysts systematically issue biased contrarian forecasts that overshoot the publicly-available consensus forecast in the direction of their private information. In this campanion paper, we show that for those analysts that report later in the forecast-horizon, a reward scheme that is convex in relative performance may shed some light on this strategic behavior. The pattern and magnitude of the forecast bias in the last forecast are identical to the results in Bernhardt et al., and slightly higher in some sub-samples. An analysis of daily returns around the date of earnings announcement reveals that investors do not fully unravel the bias in late forecasts.

Number of Pages in PDF File: 27

JEL Classification: G2, D8, L2

working papers series