Does Investor Sentiment Affect Sell-Side Analysts' Forecast Bias and Forecast Accuracy

Posted: 11 Aug 2014

Date Written: 2013


We examine the association between investor expectations and its components and sell-side analysts’ short-run quarterly earnings forecast bias and forecast accuracy. To measure investor expectations, we use the Index of Consumer Expectations (ICE) survey and decompose it into the “fundamental” component related to underlying economic factors (FUND) and the “sentiment” component unrelated to underlying economic factors (SENT). We find that analysts are the most optimistic and the least accurate when SENT is higher. Management long-horizon earnings forecasts attenuate the effects of SENT on forecast optimism and forecast accuracy. Analysts are also the most accurate when FUND is higher. Last, the market places more weight on unexpected earnings when SENT is high. These findings suggest that analysts are affected by investor sentiment and the market reacts more strongly to unexpected earnings when analyst forecasts are the least accurate. The last result potentially explains why prior research (for example, Baker and Wurgler 2006) finds an association between investor sentiment and cross-sectional stock returns.

Suggested Citation

Walther, Beverly R. and Willis, Richard H., Does Investor Sentiment Affect Sell-Side Analysts' Forecast Bias and Forecast Accuracy (2013). Review of Accounting Studies, Vol. 18, pp. 207-227, 2013, Vanderbilt Owen Graduate School of Management Research Paper No. 2478183, Available at SSRN:

Beverly R. Walther (Contact Author)

Northwestern University - Department of Accounting Information & Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-467-1595 (Phone)
847-467-1202 (Fax)

Richard H. Willis

Vanderbilt University - Accounting ( email )

Nashville, TN 37203
United States
615-343-1050 (Phone)
615-343-7177 (Fax)

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