Analysts’ Forecasts and Asset Pricing: A Survey

Abstract

This survey reviews the literature on sell-side analysts’ forecasts and its implications for asset pricing. We review the literature on the supply and demand forces shaping analysts’ forecasting decisions as well as the implications of the information they produce for both the cash flow and the discount rate components of security returns. Analysts’ forecasts bring prices in line with the expectations they embody, consistent with the notion that analysts’ forecast contain information about future cash flows. However, analysts’ forecasts exhibit predictable biases and the market appears to underreact to the information in forecasts and not fully filter the biases in the forecasts. Analyst forecasts are also helpful in estimating expected returns on securities, but evidence on the relation between analysts’ forecasts and expected returns is still scarce. We conclude by identifying unanswered questions and offering suggestions for future research.