Truncating Optimism

• In Event: Research in Financial Accounting II

Abstract

We study the process I/B/E/S follows to aggregate analyst forecasts into a consensus and its related consequences. We have four main findings. First, I/B/E/S systematically removes optimistic forecasts from the consensus, which enhances managers’ ability to MB. This finding is robust to controlling for I/B/E/S’ guidelines for removing forecasts from the consensus, suggesting that our result is due to I/B/E/S’ discretion. Second, the relationship between optimism and removal likelihood is stronger when managers and I/B/E/S benefit most. Third, I/B/E/S’ removals are informative about firm performance. I/B/E/S removes inaccurate forecasts and investors respond to forecast removals and these reactions do not reverse subsequently. Last, removals of optimistic forecasts induce analysts to issue downward revisions. Overall, our study highlights the role of forecast aggregators in developing consensus – they truncate optimistic, inaccurate forecasts leading to a downward bias.

Authors

• Zachary R Kaplan, Washington University

• Xiumin Martin, Washington University in St. Louis

• Yifang Xie, Washington University in St Louis