Peer Deviation, Uncertainty and Analyst Forecast: Evidence from China

Abstract

This study examines how sell-side analyst’s earnings forecast behavior are influenced by peer analysts’ forecast. Based on uncertainty management theory, we propose that observing the deviation between analysts’ forecast and peers’ forecast will enhance analysts’ perception of uncertainty, which results in analysts’ adjustments of forecast behavior in the following period. Results show that when there is deviation between analysts’ forecasts and peers’ forecasts, the timeliness and optimism of analysts’ forecasts in the next period are lower. Supplementary tests show that these negative correlations are stronger when analysts have higher level of uncertainty. Moreover, the deviation between analysts’ forecasts and peers’ forecasts will enhance the analysts’ forecast accuracy. Overall, peer deviation creates uncertainty, constrains analysts’ aggressive forecast behavior, and improves their forecast performance.

Keywords: Analyst Forecasts, Uncertainty Management Theory, Peer Deviation