Earnings Skewness and Analyst Forecast Bias

Statistically optimal forecasts need not be unbiased. If analysts' objective is to provide the most accurate forecast through minimizing the mean absolute forecast error, the optimal forecast is the median instead of the mean earnings. When earnings distribution is skewed, the median is different from the mean and forecast bias is observed. Thus, analyst forecast bias could be a natural result of analysts' effort to improve forecast accuracy combined with skewed distribution of earnings. We find that earnings skewness explains a significant amount of variation in analyst forecast bias across firms, across fiscal quarters and across time. Moreover, the market appears to understand at least part of the skewness-induced bias and adjusts accordingly. One salient feature of our explanation is that we predict not only forecast optimism for firms with negatively skewed earnings, but also pessimism for firms with positively skewed earnings, thus providing a more coherent explanation of analyst forecast bias.

[1]  Maureen F. McNichols,et al.  Self-selection and Analyst Coverage , 1997 .

[2]  Victor L. Bernard,et al.  Tests of Analysts' Overreaction/Underreaction to Earnings Information as an Explanation for Anomalous Stock Price Behavior , 1992 .

[3]  Jennifer Francis,et al.  ANALYSTS DECISIONS AS PRODUCTS OF A MULTITASK ENVIRONMENT , 1993 .

[4]  Sudipta Basu,et al.  Conservatism and the Asymmetric Timeliness of Earning , 1995 .

[5]  Ravi Bhushan,et al.  Firm characteristics and analyst following , 1989 .

[6]  Douglas J. Skinner.  Earnings Disclosures and Stockholder Lawsuits , 1995 .

[7]  Donna R. Philbrick,et al.  Using Value Line And Ibes Analyst Forecasts In Accounting Research , 1991 .

[8]  L. Brown,et al.  Security Analyst Superiority Relative to Univariate Time-Series Models in Forecasting Quarterly Earnings , 1987 .

[9]  Carolyn B. Levine,et al.  Earnings Predictability and Bias in Analysts? Earnings Forecasts , 1998 .

[10]  Susan Pourciau.  Earnings management and nonroutine executive changes , 1993 .

[11]  S. Kothari,et al.  Implications of Data Restrictions on Performance Measurement and Tests of Rational Pricing , 1999 .

[12]  Sudipta Basu,et al.  Loss Firms and Analysts' Earnings Forecast Errors , 1996 .

[13]  R. H. Willis,et al.  Do security analysts improve their performance with experience , 1997 .

[14]  Shyam Sunder Yale.  Common Knowledge and Accounting , 1999 .

[15]  Sudipta Basu,et al.  Auditor Conservatism and Quarterly Earnings , 2002 .

[16]  W. Hopwood,et al.  The Predictability Of Interim Earnings Over Alternative Quarters , 1984 .

[17]  Sudipta Basu.  The conservatism principle and the asymmetric timeliness of earnings , 1997 .

[18]  P. C. O'brien.  Forecast accuracy of individual analysts in nine industries , 1990 .

[19]  Siva Nathan,et al.  The Effect of Investment Banking Relationships on Financial Analysts' Earnings Forecasts and Investment Recommendations* , 1995 .

[20]  K. West,et al.  FORECAST EVALUATION , 2022 .

[21]  Ross L. Watts,et al.  SOME TIME SERIES PROPERTIES OF ACCOUNTING INCOME , 1972 .

[22]  Michael B. Clement.  Analyst Forecast Accuracy: Do Ability, Resources and Portfolio Complexity Matter? , 1999 .

[23]  R. H. Willis,et al.  Does Forecast Accuracy Matter to Security Analysts , 1999 .

[24]  Maureen F. McNichols,et al.  Underwriting relationships, analysts' earnings forecasts and investment recommendations , 1998 .

[25]  Shyam Sunder,et al.  Theory of Accounting and Control , 1996 .

[26]  Margaret A. Neale,et al.  Expertise in forecasting performance of security analysts , 1999 .

[27]  Value Line and I/B/E/S Earnings Forecasts in the Presence of Nonrecurring Gains and Losses: Evidence of Inconsistency , 1997 .

[28]  Kirt C. Butler,et al.  THE FORECAST ACCURACY OF INDIVIDUAL ANALYSTS - EVIDENCE OF SYSTEMATIC OPTIMISM AND PESSIMISM , 1991 .

[29]  L. Brown.  Managerial Behavior and the Bias in Analysts' Earnings Forecasts , 1998 .

[30]  Orie E. Barron,et al.  Using Analysts' Forecasts to Measure Properties of Analysts' Information Environment , 1998 .

[31]  L. Brown,et al.  Analyst Forecasting Errors: Additional Evidence , 1997 .

[32]  J. Francis.  Discussion of self-selection and analyst coverage , 1997 .

[33]  Terence Lim,et al.  Rationality and Analysts' Forecast Bias , 2001 .

[34]  Incentives Versus Standards: Properties of Accounting Income in Four East Asian Countries, and Implications for Acceptance of IAS , 2000 .

[35]  R. Ball,et al.  An empirical evaluation of accounting income numbers , 1968 .

[36]  Debra C. Jeter,et al.  The effect of reporting restructuring charges on analysts’ forecast revisions and errors , 1999 .