Analysts' Conflict of Interest and Biases in Earnings Forecasts
Louis K.C. Chan
University of Illinois at Urbana-Champaign - Department of Finance
Jason J. Karceski
LSV Asset Management
University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER)
NBER Working Paper No. w9544
Analysts' 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' conflict of interest and their incentives to adjust strategically forecasts to avoid earnings disappointments. We document shifts in the distribution of earnings surprises, the market's response to surprises and forecast revisions, and in the predictability of non-negative surprises. Further confirmation is based on subsamples where conflicts of interest are more pronounced, including growth stocks and stocks with consecutive non-negative surprises; however shifts are less notable in international markets.
Number of Pages in PDF File: 48
Date posted: March 8, 2003
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