Analyst Forecast Consistency

Abstract

We show empirically that analysts who display more consistent forecast errors have greater ability to affect prices, and that this effect is larger than that of stated accuracy. These results lead to three implications. First, consistent analysts are less likely to be demoted and are more likely to be nominated All Star analysts. Second, analysts strategically deliver downward‐biased forecasts to increase their consistency (if at the expense of stated accuracy). Finally, the benefits of consistency and of “lowballing” (accuracy) are increasing (decreasing) in institutional investors’ presence.

How do analysts interpret management range forecasts?

“…These results suggest that our finding of analysts' overweight on the lower bound of management range forecasts is distinct from the documented phenomena of analysts ''lowballing'' their forecasts and managers' ''walking down'' analyst expectations (e.g., Cotter et al, 2006;Hilary & Hsu, 2013;Ke & Yu, 2006;Matsumoto, 2002). While these phenomena focus on the ''distance'' of analysts' forecasts to management forecasts or to actual earnings, our focus is on the ''weight'' of analyst forecast revision on the upper and lower bounds of management range forecasts.…”

“…However, analysts' overweight on the lower bound of management range forecasts does not seem to be driven by their incentives to ''lowball'' their forecasts (Hilary & Hsu, 2013;Ke & Yu, 2006). Finally, using actual reported earnings to impute the ''optimal'' forecast revision by a hypothetical analyst with perfect foresight, we find that the ''optimal'' weight also lies more on the lower bound than on the upper bound.…”

“…Prior research suggests that analysts have incentives to ''lowball'' their forecasts so that managers could meet or beat their forecasts more easily and possibly return the favor with more private communication (Hilary & Hsu, 2013;Ke & Yu, 2006). However, analysts also want to avoid issuing forecasts that are too gloomy because poor expectations could hurt the firm's stock price and anger managers to limit the analysts' access to management (Brown, Call, Clement, & Sharp, 2013).…”

“…likely to favor analysts issuing ''low ball'' forecasts (Hilary & Hsu, 2013). Prior literature suggests that managers have stronger incentives to meet and beat analyst forecasts if they have done so in the recent past (Kross et al, 2011).…”

Analysts’ earnings forecasts: coexistence and dynamics of overconfidence and strategic incentives

“…A positive distortion factor is motivated by the evidence that forecast accuracy matters (see e.g. Gu andWu 2003, Hilary andHsu 2013), making it less likely that analysts reverse their initial Bayesian forecasts. This is reasonable for initial positive and initial large negative forecasts, 2 but it is possibly not valid for initial negative, but near-zero forecasts.…”