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Analysts' Conflicts of Interest and Biases in Earnings Forecasts

Published online by Cambridge University Press:  06 April 2009

Louis K. C. Chan ,
Jason Karceski  and
Josef Lakonishok
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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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 42 , Issue 4 , December 2007 , pp. 893 - 913
Copyright
Copyright © School of Business Administration, University of Washington 2007

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