Bias and Efficiency: A Comparison of Analyst Forecasts and Management Forecasts
33 Pages Posted: 20 Nov 2012 Last revised: 24 Feb 2013
Date Written: February 21, 2013
Extant literature documents that analyst forecasts are optimistically biased and fail to incorporate information in prior returns. This paper extends similar tests to examine management forecast characteristics. We find that, in contrast to analyst forecast errors, management forecast errors cannot be predicted by prior returns or accruals. We also document that while both management forecasts and analyst forecasts are inaccurate, the sources of the inaccuracies are different. For the sample of firms that have analyst as well as management forecasts available, management forecasts are more efficient, which we define as better reflecting information in stock prices. However, management forecasts are more optimistically biased compared to analyst forecasts. We also find that the biases in management forecasts and inefficiency in analyst forecasts decline for more recent forecasts, however, the biases and inefficiencies are not eliminated.
Keywords: management forecasts, analyst forecasts, forecast bias, market efficiency
JEL Classification: D82, G17, M10, M41
Suggested Citation: Suggested Citation