Hostname: page-component-586b7cd67f-2plfb Total loading time: 0 Render date: 2024-11-22T16:28:48.018Z Has data issue: false hasContentIssue false
  • English
  • Français

Analysts' Conflicts of Interest and Biases in Earnings Forecasts

Published online by Cambridge University Press:  06 April 2009

Louis K. C. Chan ,
Jason Karceski  and
Josef Lakonishok
Get access Rights & Permissions [Opens in a new window]

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' conflicts of interest and their incentives to strategically adjust forecasts to avoid earnings disappointments. We document shifts in the distribution of earnings surprises and related changes in the market's response to surprises and forecast revisions. The evidence for shifts is stronger for growth stocks, where conflicts of interest are more pronounced. However, shifts are less notable for analysts without ties to investment banking and in international markets.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 42 , Issue 4 , December 2007 , pp. 893 - 913
Copyright
Copyright © School of Business Administration, University of Washington 2007

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Abarbanell, J. S., and Lehavy, R.. “Differences in Commercial Database Reported Earnings: Implications for Inferences Concerning Forecast Rationality, the Association between Prices and Earnings, and Firm Reporting Discretion.” Working Paper, University of North Carolina (2000).Google Scholar
Abarbanell, J. S., and Lehavy, R.. “Can Stock Recommendations Predict Earnings Management and Analysts' Earnings Forecast Errors?” Journal of Accounting Research, 41 (2003), 1–31.Google Scholar
Bartov, E.; Givoly, D.; and Hayn, C.. “The Rewards to Meeting or Beating Earnings Expectations.” Journal of Accounting and Economics, 33 (2002), 173–204.Google Scholar
Brown, L. D. “A Temporal Analysis of Earnings Surprises: Profits versus Losses.” Journal of Accounting Research, 39 (2001), 221–241.CrossRefGoogle Scholar
Chan, L. K. C.; Karceski, J.; and Lakonishok, J.. “New Paradigm or Same Old Hype in Equity Investing?” Financial Analysts Journal, 56 (2000), 23–36.CrossRefGoogle Scholar
Chan, L. K. C.; Karceski, J.; and Lakonishok, J.. “The Level and Persistence of Growth Rates.” Journal of Finance, 58 (2003), 643–684.CrossRefGoogle Scholar
Cowen, A.; Groysberg, B.; and Healy, P. M.. “Which Types of Analyst Firms Make More Optimistic Forecasts?” Working Paper, Harvard University (2003).Google Scholar
Degeorge, F.; Patel, J.; and Zeckhauser, R.. “Earnings Management to Exceed Thresholds.” Journal of Business, 72 (1999), 1–32.CrossRefGoogle Scholar
Dugar, A., and Nathan, S.. “The Effect of Investment Banking Relationships on Financial Analysts' Earnings Forecasts and Investment Recommendations.” Contemporary Accounting Research, 12 (1995), 131–160.Google Scholar
Fox, J. “Learn to Play the Earnings Game (and Wall Street Will Love You).” Fortune, 135 (1997), 76–80.Google Scholar
Francis, J.; Schipper, K.; and Vincent, L.. “Expanded Disclosures and the Increased Usefulness of Earnings Announcements.” Accounting Review, 77 (2002a), 515–546.CrossRefGoogle Scholar
Francis, J.; Schipper, K.; and Vincent, L.. “Earnings Announcements and Competing Information.” Journal of Accounting and Economics, 33 (2002b), 313–342.Google Scholar
Fried, D., and Givoly, D.. “Financial Analysts' Forecasts of Earnings: A Better Surrogate for Market Expectations.” Journal of Accounting and Economics, 4 (1982), 85–107.Google Scholar
Kasznik, R., and McNichols, M. F.. “Does Meeting Earnings Expectations Matter? Evidence from Analyst Forecast Revisions and Share Prices.” Journal of Accounting Research, 40 (2002), 727–759.Google Scholar
Klein, A. “A Direct Test of the Cognitive Bias Theory of Share Price Reversals.” Journal of Accounting and Economics, 13 (1990), 155–166.CrossRefGoogle Scholar
Landsman, W. R., and Maydew, E. L.. “Has the Information Content of Annual Earnings Announcements Declined in the Past Three Decades?” Journal of Accounting Research, 40 (2002), 797–808.CrossRefGoogle Scholar
Lin, H., and McNichols, M. F.. “Underwriting Relationships, Analysts' Earnings Forecasts and Investment Recommendations.” Journal of Accounting and Economics, 25 (1998), 101–127.Google Scholar
Lopez, T. J., and Rees, L.. “The Effect of Beating Analysts' Forecasts on the Information Content of Unexpected Earnings.” Journal of Accounting, Auditing and Finance, 17 (2002), 155–184.Google Scholar
Matsumoto, D. A. “Management's Incentives to Avoid Negative Earnings Surprises.” Accounting Review, 77 (2002), 483–514.CrossRefGoogle Scholar
McGee, S. “As Stock Market Surges Ahead, ‘Predictable’ Profits are Driving It.” The Wall Street Journal, 05 5, 1997.Google Scholar
Michaely, R., and Womack, K. L.. “Conflict of Interest and the Credibility of Underwriter Analyst Recommendations.” Review of Financial Studies, 12 (1999), 653–686.Google Scholar
Morgenson, G. “Market Watch: So Many Analysts, So Little Analysis.” New York Times, 07 18, 1999.Google Scholar
Payne, J. L., and Thomas, W. B.. “The Implications of Using Stock-Split Adjusted I/B/E/S Data in Empirical Research.” Accounting Review, 78 (2003), 1049–1067.Google Scholar
Richardson, S.; Teoh, S. H.; and Wysocki, P.. “The Walkdown to Beatable Forecasts: The Role of Equity Issuance and Insider Trading Incentives.” Contemporary Accounting Research, 21 (2004),885–924.CrossRefGoogle Scholar
Vickers, M. “Ho-hum, Another Earnings Surprise.” Business Week, 05 24, 1999, 83–84.Google Scholar