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Forecast Bias and Analyst Independence

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  • Phillip J. McKnight
  • Steven K. Todd

Abstract

This paper examines the accuracy of equity analysts who provide earnings forecasts for European companies. We find strong evidence of institutional bias in analysts’ forecasts, specifically, when analysts move between sell-side employers and independent employers, they issue more accurate forecasts while they are employed by independent firms. Moreover, these differences persist when we hold constant the set of firms these mobile analysts research. We find statistically significant differences in the forecast accuracy of sell-side and independent analysts. The optimistic bias of sell-side analysts appears to be related to underwriting activity. Analysts employed by lead underwriters produce less accurate forecasts for newly public companies than do either buy-side or independent analysts. The optimistic bias persists for a five-year period following an IPO.

Suggested Citation

  • Phillip J. McKnight & Steven K. Todd, 2013. "Forecast Bias and Analyst Independence," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(2), pages 3-32.
    • Handle: RePEc:ers:ijebaa:v:i:y:2013:i:2:p:3-32
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    More about this item

    Keywords

    Analysts; Forecasts; Bias; Sell-side; Buy-side; Independent;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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