Understanding the Biases in Analyst Forecasts

Abstract:     
Researchers have examined the relation between expected growth and analyst forecast bias and found mixed evidence, in that forecast bias differs significantly between high-growth and low-growth firms when the P/B ratio is used to measure expected growth, but not when the P/E ratio is used in this capacity. In this paper, I use P/B and P/E ratios jointly to more precisely investigate the relation of expected growth with forecast errors. I observe that the relation between P/E and forecast errors depends on the P/B level, explaining the low overall relation between P/E and forecast errors found in previous studies.

Number of Pages in PDF File: 47

Keywords: price-to-book ratio, price-to-earnings ratio, analyst forecasts

JEL Classification: G29, G12, M41

working papers series