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Analysts' Rationality and Forecast Bias: Evidence from Sales Forecasts

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Abstract

When optimistic forecasts can improve access to management, rational analysts have incentives to issue optimistically-biased forecasts (Lim, 2001). This paper proposes that the extent of this optimistic forecast bias will depend on the forecast's importance to management. If management attaches less importance to a forecasted measure, analysts should decrease their forecast bias because the expected benefits of issuing optimistic forecasts are less. We examine analysts' earnings and sales forecasts, and predict that analysts' optimistic bias will be greater for earnings than for sales. Results are consistent with our predictions and contribute to the evidence that analysts' forecast bias is rational and intentional.

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Authors and Affiliations

  1. Stillman School of Business, Seton Hall University, 400 South Orange Avenue, South Orange, NJ, 07079

    David P. Mest

  2. Department of Accounting, College of Business Administration, University of North Texas, P.O. Box 305219, Denton, TX, 76203-5219, USA

    Elizabeth Plummer

Authors
  1. David P. Mest
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  2. Elizabeth Plummer
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Correspondence to Elizabeth Plummer.

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Mest, D.P., Plummer, E. Analysts' Rationality and Forecast Bias: Evidence from Sales Forecasts. Review of Quantitative Finance and Accounting 21, 103–122 (2003). https://doi.org/10.1023/A:1024841531461

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  • DOI: https://doi.org/10.1023/A:1024841531461

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