Is There Safety in Numbers? The Effects of Forecast Accuracy and Forecast Boldness on Financial Analysts' Credibility with Investors

Posted: 24 Apr 2009

See all articles by Kathryn Kadous

Kathryn Kadous

Emory University - Goizueta Business School

Molly Mercer

DePaul University

Jane M. Thayer

Georgia Institute of Technology

Multiple version iconThere are 2 versions of this paper

Date Written: April 21, 2009

Abstract

This paper reports the results of an experiment that examines how analyst forecast accuracy (i.e., how close an analyst's forecast is to realized earnings) and forecast boldness (i.e. how far the analyst's forecast is from the consensus forecast) affect the analyst’s perceived credibility and investors' willingness to rely on and purchase the analyst's future reports. We hypothesize and find that forecast boldness generally magnifies the effect of forecast accuracy on these variables. That is, analysts who provide accurate, bold forecasts generally experience more positive consequences than those who provide accurate, non-bold forecasts, and analysts who provide inaccurate, bold forecasts experience more negative consequences than those who provide inaccurate, non-bold forecasts. We also find that these effects are not symmetric - the negative consequences of being bold and inaccurate exceed the positive consequences of being bold and accurate. This asymmetry helps explain why analysts are hesitant to deviate from the consensus forecast (i.e., why analysts herd).

Keywords: Financial analysts, Herding, Credibility, Attribution

JEL Classification: G24, G29, M41, N22

Suggested Citation

Kadous, Kathryn and Mercer, Molly and Thayer, Jane M., Is There Safety in Numbers? The Effects of Forecast Accuracy and Forecast Boldness on Financial Analysts' Credibility with Investors (April 21, 2009). Contemporary Accounting Research, Vol. 26, No. 3, 2009, Available at SSRN: https://ssrn.com/abstract=1392828

Kathryn Kadous (Contact Author)

Emory University - Goizueta Business School ( email )

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Molly Mercer

DePaul University ( email )

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Chicago, IL 60604
United States
(312)362-8956 (Phone)

Jane M. Thayer

Georgia Institute of Technology

Atlanta, GA 30332
United States

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