Review of Accounting Studies

, Volume 18, Issue 1, pp 207–227

Do investor expectations affect sell-side analysts’ forecast bias and forecast accuracy?

Authors

    • Kellogg School of ManagementNorthwestern University
  • Richard H. Willis
    • Owen Graduate School of ManagementVanderbilt University
Article

DOI: 10.1007/s11142-012-9204-9

Cite this article as:
Walther, B.R. & Willis, R.H. Rev Account Stud (2013) 18: 207. doi:10.1007/s11142-012-9204-9

Abstract

We examine the association between investor expectations and its components and sell-side analysts’ short-run quarterly earnings forecast bias and forecast accuracy. To measure investor expectations, we use the Index of Consumer Expectations survey and decompose it into the “fundamental” component related to underlying economic factors (FUND) and the “sentiment” component unrelated to underlying economic factors (SENT). We find that analysts are the most optimistic and the least accurate when SENT is higher. Management long-horizon earnings forecasts attenuate the effects of SENT on forecast optimism and forecast accuracy. Analysts are also the most accurate when FUND is higher. Last, the market places more weight on unexpected earnings when SENT is high. These findings suggest that analysts are affected by investor sentiment and the market reacts more strongly to unexpected earnings when analyst forecasts are the least accurate. The last result potentially explains why prior research (for example, Baker and Wurgler, The Journal of Finance 61:1645–1680, 2006) finds an association between investor sentiment and cross-sectional stock returns.

Keywords

Security analystsForecast accuracyForecast biasMarket reactionInvestor sentiment

JEL classifications

G14G17G24M41N10

Copyright information

© Springer Science+Business Media, LLC 2012