Download This PaperAre Analyst Forecast Errors Really Kinky?
50 Pages Posted: 29 May 2024 Last revised: 3 Mar 2026
Date Written: May 24, 2024
Abstract
The distribution of analyst forecast errors exhibits a well-known "kink"—a disproportionate frequency of small positive earnings surprises relative to small misses—widely attributed to managerial earnings management. We show that approximately 66% of this asymmetry is instead attributable to analyst strategic behavior. Analysts systematically under-revise earnings forecasts while issuing directionally consistent target price and recommendation revisions in the same report, a practice we term bundling. Using out-of-sample industry-year coefficients to remove the predictable forecast bias associated with bundling, we find the ratio of small positive to small negative forecast errors falls from 2.43 to 1.49. Bundling intensity predicts earnings surprises at both the report and firm-quarter levels, and intensifies during periods of macroeconomic uncertainty. Firms with higher analyst bundling rely less on discretionary accruals to meet or beat forecasts, suggesting analyst-induced bias and earnings management are substitutes. These findings imply that studies using meet-or-beat indicators as proxies for earnings management are partially capturing analyst strategic behavior.
Keywords: Financial Analysts, Earnings Announcements, Financial Accounting, Capital Markets, Earnings Forecasts, Analyst Forecast Error, Earnings Surprises, Target prices, Stock recommendations, Soft Information
JEL Classification: G1, G10, M41
Suggested Citation: Suggested Citation
Are Analyst Forecast Errors Really Kinky?
(May 24, 2024). SMU Cox School of Business Research Paper No. 24-6, Available at SSRN: https://ssrn.com/abstract=4839739 or http://dx.doi.org/10.2139/ssrn.4839739Mary E. Barth
Stanford Graduate School of Business ( email )
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Wayne R. Landsman
University of North Carolina Kenan-Flagler Business School ( email )
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Sean Wang (Contact Author)
Southern Methodist University (SMU) - Accounting Department ( email )
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