Uncertainty About Future Earnings as a Determinant of Bias in Analysts'Earnings Forecasts
Posted: 3 Jul 1998
Date Written: Undated
Researchers have identified numerous factors associated with security analysts' optimistic bias, including size, earnings-to-price ratio, forecast dispersion, past returns, and past forecast errors. These factors are viewed as having future earnings uncertainty as a common attribute. Empirical evidence consistent with this view is presented. Using these factors as proxies for future earnings uncertainty, univariate tests show that analysts' bias increases as uncertainty increases. Multivariate tests indicate that each of the uncertainty proxies incrementally explains bias, after controlling for the other variables. A model is developed which significantly improves accuracy by reducing both forecast bias and forecast error variance in tests on holdout samples.
JEL Classification: G14, M41
Suggested Citation: Suggested Citation