A Theory of Analysts Forecast Bias

Murugappa (Murgie) Krishnan

Yeshiva University

Shiva Sivaramakrishnan

Texas A&M University - Department of Accounting

In this paper, we provide an equilibrium explanation for the observed optimism in analysts' earnings forecasts. Our analysis provides theoretical support to the widely held notion that analysts engage in earnings optimism to gain access to management's private information. We show that a strategic analyst, who is motivated by improving the combined accuracy of his forecasts, issues a biased initial forecast to extract information from management, but issues unbiased forecasts subsequently. The management, on the other hand, provides more access because this optimistic bias reduces the proprietary costs associated with disclosure at the margin. An important element of our model is the assumption that analysts also have private information relevant to assessing firm value. Despite rational expectations about analyst bias, analysts' private information cannot be fully unravelled by other agents due to the noise introduced by the diversity in analysts' incentives.

JEL Classification: G14, M41

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Date posted: December 31, 1998  

Suggested Citation

Krishnan, Murugappa (Murgie) and Sivaramakrishnan, Shiva, A Theory of Analysts Forecast Bias. Available at SSRN: http://ssrn.com/abstract=5308

Contact Information

Murugappa (Murgie) Krishnan (Contact Author)
Yeshiva University ( email )
500 West 185th Street
New York, NY 10033
United States
Shiva Sivaramakrishnan
Texas A&M University - Department of Accounting ( email )
430 Wehner
College Station, TX 77843-4353
United States

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