A Positive Model of Earnings Forecasts: Top Down Versus Bottom Up

Abstract

This article analyzes the behavior of two groups of corporate earnings forecasters: analysts, who follow individual company fortunes, and market strategists, who predict earnings for various company aggregates. Using data for two market indices, the S&P 500 and the Dow Jones Industrial Average, we document that bottom-up forecasts are systematically more optimistic than top-down forecasts made by strategists. This difference is not driven by the difference in the forecast target. This finding may be explained by the incentives that analysts face and/or by cognitive bias.

JEL Classification: G14, G29, M41