How (Over) Confident Are Financial Analysts?

Journal of Behavioral Finance, Volume 19 (3), 308-318, 2017

Posted: 27 Dec 2019

See all articles by Ning Du

Ning Du

DePaul University - School of Accountancy and MIS

David V. Budescu

Fordham University - Fordham College at Rose Hill

Date Written: December 15, 2017

Abstract

Extensive research has been devoted to the quality of analysts’ earnings forecasts. The common finding is that analysts’ forecasts are not very accurate. Prior studies have tended to focus on the mean of forecasts and measure accuracy using various summaries of forecast errors. The present study sheds new light on the accuracy of analysts’ forecasts, by measuring how well calibrated these forecasts are. The authors follow the tradition of calibration studies in psychological literature and measure the degree of calibration by the hit rate. They analyze a year’s worth of data from the Institutional Brokers Estimate System database, which includes over 200,000 annual earnings forecasts made by over 6,000 analysts for over 5,000 companies. By using different ways to convert analysts’ point estimates of earnings into a range of values, the authors establish the bounds that are necessary to determine the hit rates, and examine to what extent the actual earnings announced by the companies are bracketed by these intervals. These hit rates provide a more complete picture of the accuracy of the forecasts.

Keywords: Financial analyst; Earning forecasts; Overconfidence; Judgment and decision making; Calibration

JEL Classification: G02

Suggested Citation

Du, Ning and Budescu, David V., How (Over) Confident Are Financial Analysts? (December 15, 2017). Journal of Behavioral Finance, Volume 19 (3), 308-318, 2017, Available at SSRN: https://ssrn.com/abstract=3499357

Ning Du (Contact Author)

DePaul University - School of Accountancy and MIS ( email )

1 E. Jackson Blvd
Chicago, IL 60607
United States
312-362-8308 (Phone)

David V. Budescu

Fordham University - Fordham College at Rose Hill ( email )

United States

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