Review of Accounting Studies

, Volume 18, Issue 1, pp 207–227

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


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


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.


Security analysts Forecast accuracy Forecast bias Market reaction Investor sentiment 

JEL classifications

G14 G17 G24 M41 N10 

Copyright information

© Springer Science+Business Media, LLC 2012

Authors and Affiliations

  1. 1.Kellogg School of ManagementNorthwestern UniversityEvanstonUSA
  2. 2.Owen Graduate School of ManagementVanderbilt UniversityNashvilleUSA