Do Financial Analysts Herd?

Abstract

Financial analysts may have strategic incentives to herd or to anti-herd when issuing forecasts of firms' earnings. This paper develops and implements a new test to examine whether such incentives exist and to identify the form of strategic behavior. We use the equilibrium property of the finite-player forecasting game of Kim and Shim (2019) that forecast dispersion decreases as the number of forecasters increases if and only if there is strategic complementarity in their forecasts. We find strong evidence that supports strategic herding behavior of financial analysts. This finding is robust to different forecast horizons and sequential forecast release.

Keywords: financial analysts, earnings forecasting, finite-player forecasting game, strategic behavior, herding

JEL Classification: D83, E37, G17