Separating the Effects of Asymmetric Incentives and Inefficient Use of Information on Financial Analysts' Consensus Earnings Forecast Errors
33 Pages Posted: 8 Aug 2005
Date Written: July 2005
Prior research on financial analysts' consensus earnings forecast errors has tended to explore either incentives-based or inefficient information use-based explanations for the properties of the analysts' forecast errors. This has limited our understanding of financial analysts' expectation formation process as incentives and cognitive biases are likely to simultaneously affect the properties of the analysts' consensus forecast errors. Our main contribution is in separating these two effects. In particular, using consensus quarterly earnings forecast data, we document that analysts have asymmetric loss function, and that they do not fully use past earnings and forecast errors information in minimizing their expected loss.
Keywords: earnings forecasts, loss function, forecast optimality
JEL Classification: G29, M41, D84
Suggested Citation: Suggested Citation