Analysts' Conflict of Interest and Biases in Earnings Forecasts

58 Pages Posted: 11 May 2003

See all articles by Louis K.C. Chan

Louis K.C. Chan

University of Illinois at Urbana-Champaign - Department of Finance

Jason J. Karceski

LSV Asset Management

Josef Lakonishok

University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: November 2003

Abstract

Analysts' earnings forecasts are influenced by their desire to win investment banking clients. We hypothesize that the equity bull market of the 1990s, along with the boom in investment banking business, exacerbated analysts' conflict of interest and their incentives to adjust strategically forecasts to avoid earnings disappointments. We document shifts in the distribution of earnings surprises, the market's response to surprises and forecast revisions, and in the predictability of non-negative surprises. Further confirmation is based on subsamples where conflicts of interest are more pronounced, including growth stocks and stocks with consecutive non-negative surprises; however shifts are less notable for analysts without ties to investment banking and in international markets.

JEL Classification: G12, G14, G24

Suggested Citation

Chan, Louis K.C. and Karceski, Jason J. and Lakonishok, Josef, Analysts' Conflict of Interest and Biases in Earnings Forecasts (November 2003). AFA 2004 San Diego Meetings; EFMA 2003 Helsinki Meetings. Available at SSRN: https://ssrn.com/abstract=392004 or http://dx.doi.org/10.2139/ssrn.392004

Louis K.C. Chan (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-333-6391 (Phone)
217-244-3102 (Fax)

Jason J. Karceski

LSV Asset Management ( email )

155 N Wacker Dr.
Chicago, IL 60654
United States
352-246-7674 (Phone)

Josef Lakonishok

University of Illinois at Urbana-Champaign ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-333-7185 (Phone)
217-244-3102 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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