Truncating Optimism

77 Pages Posted: 31 Jul 2018 Last revised: 11 Aug 2021

See all articles by Zachary Kaplan

Zachary Kaplan

Washington University in St. Louis - John M. Olin Business School

Xiumin Martin

Washington University in Saint Louis - Olin School of Business

Yifang Xie

Georgetown University - McDonough School of Business; Georgetown University - Department of Accounting and Business Law

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2021

Abstract

Consensus estimates, formed by taking an average of analyst forecasts, play an important role in capital markets (e.g., provide investors with a proxy for earnings expectations). We show I/B/E/S, a prominent information intermediary, removes 6% of one-quarter-ahead earnings forecasts before calculating the consensus and among the 23% of firm-quarters with at least one forecast removed, this figure rises to 16%. We provide evidence suggesting that I/B/E/S subjectively applies policies that govern its removal decisions and accepts feedback from firms that contributes to this subjectivity. Specifically, we find optimistic forecasts are removed more frequently than pessimistic forecasts, and such asymmetry increases further when removals allow firms to meet or beat the consensus. Furthermore, we find that these effects are more pronounced when managers’ incentives to just meet or beat the consensus are stronger (i.e., higher subsequent insider sales or higher compensation delta), or managers have greater ability to influence I/B/E/S. Lastly, we demonstrate that these subjective removals benefit I/B/E/S by improving consensus accuracy, explaining why I/B/E/S is willing to be influenced by firms.

Keywords: Forecast removals, firm influence, expectation management, analyst forecasts, I/B/E/S, forecast optimism, consensus accuracy

JEL Classification: D62, D82, G14, M40, M41

Suggested Citation

Kaplan, Zachary and Martin, Xiumin and Xie, Yifang, Truncating Optimism (July 1, 2021). Available at SSRN: https://ssrn.com/abstract=3213833 or http://dx.doi.org/10.2139/ssrn.3213833

Zachary Kaplan

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Xiumin Martin (Contact Author)

Washington University in Saint Louis - Olin School of Business ( email )

Saint Louis, MO 63130
United States

Yifang Xie

Georgetown University - McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States

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