Working Paper: NBER ID: w9544
Authors: Louis K.C. Chan; Jason Karceski; Josef Lakonishok
Abstract: Analysts' earnings forecasts are influenced by their desire to win investment banking clients. We hypothesize that the equity bull market of the 1990s, along with the boom in investment banking business, exacerbated analysts' conflict of interest and their incentives to adjust strategically forecasts to avoid earnings disappointments. We document shifts in the distribution of earnings surprises, the market's response to surprises and forecast revisions, and in the predictability of non-negative surprises. Further confirmation is based on subsamples where conflicts of interest are more pronounced, including growth stocks and stocks with consecutive non-negative surprises; however shifts are less notable in international markets.
Keywords: No keywords provided
JEL Codes: G12; G14; G24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| analysts' conflicts of interest (G24) | biases in earnings forecasts (G17) |
| bull market of the 1990s (N22) | analysts' behavior (G41) |
| bull market of the 1990s (N22) | higher incidence of nonnegative earnings surprises (G14) |
| analysts' motivations (G41) | adjustments in forecasts (C53) |
| analysts' strategic adjustments (F32) | nonnegative earnings surprises (G14) |
| shifts in the distribution of earnings surprises (D39) | increase in nonnegative surprises (D80) |
| observable characteristics (C90) | likelihood of nonnegative surprise (D80) |
| market returns responsiveness (G19) | increased investor sensitivity to earnings surprises (G14) |