Separating the Effects of Asymmetric Incentives and Inefficient Use of Information on Financial Analysts' Consensus Earnings Forecast Errors

Markov, Stanimir; Tan, Min Yen

doi:10.2139/ssrn.768324

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Separating the Effects of Asymmetric Incentives and Inefficient Use of Information on Financial Analysts' Consensus Earnings Forecast Errors

33 Pages Posted: 8 Aug 2005

See all articles by Stanimir Markov

Stanimir Markov

University of Texas at Dallas - Naveen Jindal School of Management

Min Yen Tan

Singapore Management University - School of Accountancy

Date Written: July 2005

Abstract

Prior research on financial analysts' consensus earnings forecast errors has tended to explore either incentives-based or inefficient information use-based explanations for the properties of the analysts' forecast errors. This has limited our understanding of financial analysts' expectation formation process as incentives and cognitive biases are likely to simultaneously affect the properties of the analysts' consensus forecast errors. Our main contribution is in separating these two effects. In particular, using consensus quarterly earnings forecast data, we document that analysts have asymmetric loss function, and that they do not fully use past earnings and forecast errors information in minimizing their expected loss.

Keywords: earnings forecasts, loss function, forecast optimality

JEL Classification: G29, M41, D84

Suggested Citation: Suggested Citation

Markov, Stanimir and Tan, Min Yen, Separating the Effects of Asymmetric Incentives and Inefficient Use of Information on Financial Analysts' Consensus Earnings Forecast Errors (July 2005). Available at SSRN: https://ssrn.com/abstract=768324 or http://dx.doi.org/10.2139/ssrn.768324