Behaviors Of Individual Analysts' Earnings Forecasts: Asymmetric Irrationality And Firm Effects

In this paper the authors reexamine individual analysts' rationality in earnings forecasts using a two-way (analyst versus firm) fixed effect analysis on parameters of an AR(1) model that characterize important aspects of analysts' performance in forecasting. Their analysis reveals a wide range of diversity in analysts' behaviors and their interactions with firm specific factors. They find that about ten percent of analysts in their sample are statistically verifiable over-optimists and they are primarily responsible for the overall upward bias typically reported in the literature. Analysts' cognitive proclivities are varied but mildly under-reactive overall.