Donal Byard

Analyst Pessimism and Forecast Timing

In this study, we show that on average relatively pessimistic analysts tend to reveal their earnings forecasts later than other analysts. Further, we find this forecast timing effect explains a substantial proportion of the well-known decrease in consensus analyst forecast optimism over the forecast period prior to earnings announcements, which helps explain why analysts’ longer term earnings forecasts are more optimistically biased than their shorter term forecasts. We extend the theory of analyst self-selection regarding their coverage decisions to argue that analysts with a relatively pessimistic view–compared to other analysts–are more reluctant to issue their earnings forecasts, with the result that they tend to defer revealing their earnings forecasts until later in the forecasting period than other analysts.

Leveling the Informational Playing Field

This study uses experimental data to compare the information generated by professional and nonprofessional investors when both groups receive access to the same financial disclosures. We also manipulate the disclosure level for both subject groups. Using the method developed by Barron, Kim, Lim and Stevens (1998), we then analyze the information contained in stock price forecasts that were made by the experimental subjects. Professionals generally possessed more information than nonprofessionals. The higher level of disclosure did not affect the information possessed by the professional investors. However, we find that a higher level of disclosure is associated with more private information being produced (or inferred) by nonprofessional investors. As a result, these subjects realized a significant improvement in the accuracy of their mean forecasts relative to their individual forecasts. This finding suggests that the enhanced capacity of firms to widely disclose information to all market participants via the Internet, together with the SEC’s new “Fair Disclosure (FD)” regulation, has the potential to produce a significant increase in privately inferred information for on-line nonprofessionals, potentially resulting in the aggregation of more diverse information into share prices.