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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 University of Florida - Department of Finance, Insurance and Real Estate Josef Lakonishok University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER) November 2003 AFA 2004 San Diego Meetings; EFMA 2003 Helsinki Meetings Abstract: 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 for analysts without ties to investment banking and in international markets.
JEL Classifications: G12, G14, G24 Working Paper SeriesDate posted: May 11, 2003 ; Last revised: January 09, 2004Suggested CitationContact Information
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