Coordinated Enticement: Analyst Optimism and CEO Optimism

Abstract:     
This paper studies the relation between analyst optimism and CEO optimism. The CEO optimism indicator is derived from unexercised option moneyness. Bias, a common measure of analyst optimism, is partly driven by information bias. To identify the correlation between CEO optimism and analyst optimism, I use a control function to control for information bias. When acting on information, analysts expect lower earnings from optimistic CEOs; the average partial effect of information bias (or expected earnings) is -33%. However there is a positive correlation between analyst optimism and CEO optimism; the average partial effect of optimism is 29%. These results remain robust when controlling for year effects and firm fixed effects. The evidence suggests that correlated optimism is driven by behavioral CEO optimism and strategic analyst optimism; strategically optimistic analysts cover behaviorally biased CEOs in an effort to influence investors.

Number of Pages in PDF File: 55

Keywords: Analyst Optimism, CEO Optimism, Earnings Forecast Bias, Earnings Management, Manipulation

JEL Classification: D03, G17, G29, J33, G39

working papers series