Time Variation in Analyst Optimism: An Investor Sentiment Explanation

Abstract

Many studies have documented that analyst forecasts are overly optimistic on average. Using quarterly observations from 1984 to 2002, this article shows that forecasts exhibit optimism for most of the quarters under examination, but the level of optimism varies substantially over time. More important, after correcting the measurement problem caused by price, this article does not find optimism greatly diminished during most of the 1990s. However, consistent with previous findings, the period of 1999 to 2000 displays pessimistic forecasts, especially for large firms and growth firms. The macroeconomic factor does not have significant impact on analyst optimism. In contrast, the time-varying investor sentiments measured by 2 Chicago Board Options Exchange (CBOE) put-call ratios, and the cross-sectional skewness in the forecast errors, play an important role in explaining the time variation in analyst optimism. Finally, analysts track institutional investor sentiment more closely, except for small firms.

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