Using Counter-explanation to Limit Analysts' Forecast Optimism
Emory University - Goizueta Business School
Susan D. Krische
American University - Kogod School of Business
Lisa M. Sedor
Prior research demonstrates that forecast optimism is, in part, a consequence of analysts' cognitive reactions to the scenarios managers use to communicate future plans. In two experiments, we examine whether counter-explanation (explaining why managers' plans could fail) reduces scenario-induced optimism. We find that when compared to analysts not asked to generate counter-explanations, analysts who complete the relatively easy task of generating few counter-explanations make less optimistic forecasts, but analysts who complete the relatively difficult task of generating many counter-explanations do not. Results demonstrate the usefulness of a cognitive, theory-based mechanism for reducing forecast optimism and suggest a boundary condition for the use of that mechanism.
Number of Pages in PDF File: 37
Keywords: Counter-explanation, availability, EPS, forecast optimism
JEL Classification: G29, M41working papers series
Date posted: February 3, 2005
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