Analyst Forecasts: It Pays to Be Off!
Journal of Investment Management (JOIM), Fourth Quarter 2013
Posted: 15 Nov 2014
Date Written: 2013
We show that analysts who display more consistent forecast errors have a greater effect on stock prices than analysts who provide more accurate but less consistent forecasts. This result leads to three implications. First, consistent analysts are less likely to be demoted to a less prestigious brokerage house and are more likely to be named All Star analysts. Second, analysts strategically "lowball" (that is, deliver downward-biased forecasts) to increase their consistency. This is because lowballing gives management an easier target to beat and, in turn, management grants analysts greater access to company information. Finally, the benefits of both consistency and lowballing increase while those of accuracy decrease when institutional/sophisticated investors are more of a presence in the analysts audience.
Keywords: Financial analysts, forecast consistency, lowballing, career outcome, sophisticated investors
JEL Classification: G00
Suggested Citation: Suggested Citation