Analysts' Conflict of Interest and Biases in Earnings Forecasts
58 Pages Posted: 11 May 2003
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Analysts' Conflict of Interest and Biases in Earnings Forecasts
Analysts' Conflict of Interest and Biases in Earnings Forecasts
Date Written: November 2003
Abstract
Analysts' earnings forecasts are influenced by their desire to win investment banking clients. We hypothesize that the equity bull market of the 1990s, along with the boom in investment banking business, exacerbated analysts' conflict of interest and their incentives to adjust strategically forecasts to avoid earnings disappointments. We document shifts in the distribution of earnings surprises, the market's response to surprises and forecast revisions, and in the predictability of non-negative surprises. Further confirmation is based on subsamples where conflicts of interest are more pronounced, including growth stocks and stocks with consecutive non-negative surprises; however shifts are less notable for analysts without ties to investment banking and in international markets.
JEL Classification: G12, G14, G24
Suggested Citation: Suggested Citation
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