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Rationality and Analysts' Forecast Bias
Abstract
This paper proposes and tests a quadratic‐loos utility function for modeling corporate earnings forecasting, where financial analysts trade off bias to improve management access and forecast accuracy. Optimal forecasts with minimum expected error are optimistically biased and exhibit predictable cross‐sectional variation related to analyst and company characteristics. Empirical evidence from individual analyst forecasts is consistent with the model's predictions. These results suggest that positive and predictable bias may be a rational property of optimal earnings forecasts. Prior studies using classical notions of unbiasedness may have prematurely dismissed analysts' forecasts as being irrational or inaccurate.
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Citations
Cited by
Clarkson, P. M., Li, Y., Richardson, G. D., & Vasvari, F. P. (2008) · Accounting, Organizations and Society · doi:10.1016/j.aos.2007.05.003 · Cited by 3,570
Representativeness revisited: Attribute substitution in intuitive judgment.
Kahneman, D., & Frederick, S. (2002) · Heuristics and Biases · doi:10.1017/cbo9780511808098.004 · Cited by 3,476
Does the stock market fully value intangibles? Employee satisfaction and equity prices
Edmans, A. (2011) · Journal of Financial Economics · doi:10.1016/j.jfineco.2011.03.021 · Cited by 2,511
Slovic, P., Finucane, M., Peters, E., & MacGregor, D. G. (2002) · Heuristics and Biases · doi:10.1017/cbo9780511808098.025 · Cited by 2,349
Gentzkow, M., & Shapiro, J. M. (2006) · Journal of Political Economy · doi:10.1086/499414 · Cited by 1,013
Metadata
- Authors
- Lim, T.
- Venue
- The Journal of Finance
- Publisher
- Wiley
- Published
- 2001-02
- Volume
- 56
- Issue
- 1
- Pages
- 369-385
- ISSN
- 0022-1082 (ISSN-L)
- 1540-6261
- OpenAlex
- W2096706783
- Cited by
- 1,012
- References
- 0
- FWCI
- 188.51
- Type
- journal article
- Language
- en
- Open access
- closed
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- Lim, T. (2001). Rationality and Analysts' Forecast Bias. The Journal of Finance. https://doi.org/10.1111/0022-1082.00329
Data sources
Bibliographic data: Semantic Scholar, OpenAlex, Crossref.
Contains information from the Semantic Scholar Academic Graph Datasets, made available under the ODC Attribution License (ODC-BY 1.0).
Semantic Scholar’s data is described in: Kinney, R., et al. (2023). The Semantic Scholar Open Data Platform. arXiv:2301.10140.
