Bias and Efficiency: A Comparison of Analyst Forecasts and Management Forecasts

33 Pages Posted: 20 Nov 2012 Last revised: 24 Feb 2013

See all articles by Urooj Khan

Urooj Khan

Columbia Business School - Accounting, Business Law & Taxation

Oded Rozenbaum

George Washington University - School of Business

Gil Sadka

University of Texas at Dallas

Date Written: February 21, 2013

Abstract

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

Khan, Urooj and Rozenbaum, Oded and Sadka, Gil, Bias and Efficiency: A Comparison of Analyst Forecasts and Management Forecasts (February 21, 2013). Available at SSRN: https://ssrn.com/abstract=2177992 or http://dx.doi.org/10.2139/ssrn.2177992

Urooj Khan

Columbia Business School - Accounting, Business Law & Taxation ( email )

3022 Broadway
New York, NY 10027
United States

Oded Rozenbaum (Contact Author)

George Washington University - School of Business ( email )

Washington, DC 20052
United States
202-994-5992 (Phone)

Gil Sadka

University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

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