Using Counter-Explanation to Limit Analysts' Forecast Optimism

Posted: 4 Aug 2005

See all articles by Kathryn Kadous

Kathryn Kadous

Emory University - Goizueta Business School

Susan D. Krische

American University - Kogod School of Business

Lisa M. Sedor

DePaul University

Multiple version iconThere are 2 versions of this paper

Abstract

Prior research demonstrates that forecast optimism is, in part, a consequence of analysts' cognitive reactions to the scenarios managers use to communicate future plans. In two experiments, we examine whether counter-explanation (explaining why managers' plans could fail) reduces scenario-induced optimism. We find that when compared to analysts not asked to generate counter-explanations, analysts who complete the relatively easy task of generating few counter-explanations make less optimistic forecasts, but analysts who complete the relatively difficult task of generating many counter-explanations do not. Results demonstrate the usefulness of a cognitive, theory-based mechanism for reducing forecast optimism and suggest a boundary condition for the use of that mechanism.

Keywords: counter-explanation, availability, EPS, forecast optimism

JEL Classification: G29, M41

Suggested Citation

Kadous, Kathryn and Krische, Susan D. and Sedor, Lisa M., Using Counter-Explanation to Limit Analysts' Forecast Optimism. Accounting Review, March 2006. Available at SSRN: https://ssrn.com/abstract=764804

Kathryn Kadous (Contact Author)

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States
404-727-4967 (Phone)

Susan D. Krische

American University - Kogod School of Business ( email )

4400 Massachusetts Ave NW
Washington, DC 20016
United States
202-885-2082 (Phone)
202-885-1992 (Fax)

Lisa M. Sedor

DePaul University ( email )

Chicago, IL 60604
United States

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