Truncating Optimism

49 Pages Posted: 31 Jul 2018 Last revised: 11 Sep 2019

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

Washington University in St. Louis - Olin School of Business

Date Written: September 1, 2019

Abstract

I/B/E/S removes 6% of one-quarter-ahead earnings forecasts from the calculation of the consensus forecast. This study examines managers’ role in these removals. We show optimistic forecasts are removed more often than pessimistic forecasts, after controlling for removal policies that I/B/E/S developed. The higher likelihood of the removal of optimistic forecasts is more pronounced when it allows managers to meet or beat the consensus, when managers have greater ability to influence I/B/E/S, or when costs of issuing management guidance are high. Additional evidence reinforces that forecast removals improve firms’ ability to meet or beat the consensus earnings. Our findings strongly suggest that managers influence I/B/E/S’s truncation of optimistic forecasts.

Keywords: Forecast removals, analyst forecasts, I/B/E/S, forecast optimism

JEL Classification: D62, D82, G14, M41

Suggested Citation

Kaplan, Zachary and Martin, Xiumin and Xie, Yifang, Truncating Optimism (September 1, 2019). 29th Annual Conference on Financial Economics & Accounting 2018. 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

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

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

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