Article2007

Analysts' Conflicts of Interest and Biases in Earnings Forecasts

Louis K.C. Chan · Jason J. Karceski · Josef Lakonishok

108 citations0/0 files storedJournal of Financial and Quantitative Analysis

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Auditing, Earnings Management, Governance Financial Markets and Investment Strategies Forecasting Techniques and Applications

Abstract

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' conflicts of interest and their incentives to strategically adjust forecasts to avoid earnings disappointments. We document shifts in the distribution of earnings surprises and related changes in the market's response to surprises and forecast revisions. The evidence for shifts is stronger for growth stocks, where conflicts of interest are more pronounced. However, shifts are less notable for analysts without ties to investment banking and in international markets.

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References

1999Earnings Management to Exceed Thresholds 2002The rewards to meeting or beating earnings expectations 2002Management's Incentives to Avoid Negative Earnings Surprises 1999Conflict of Interest and the Credibility of Underwriter Analyst Recommendations 1998Underwriting relationships, analysts' earnings forecasts and investment recommendations 2004The Walk‐down to Beatable Analyst Forecasts: The Role of Equity Issuance and Insider Trading Incentives*2002Does Meeting Earnings Expectations Matter? Evidence from Analyst Forecast Revisions and Share Prices 1995The Effect of Investment Banking Relationships on Financial Analysts' Earnings Forecasts and Investment Recommendations*

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