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Retracted: Relationship Incentives and the Optimistic/Pessimistic Pattern in Analysts' Forecasts




We examine whether analysts' incentives to maintain good relationships with management contribute to the optimistic/pessimistic within‐period time trend in analysts' forecasts. In our experiments, 81 experienced sell‐side analysts from two brokerage firms predict earnings based on historical information and management guidance. Analysts' forecasts exhibit an optimistic/pessimistic pattern across the two timing conditions (early and late in the quarter), and the effect is significantly stronger when the analysts have a good relationship with management than when their only incentive is to be accurate. Debriefing results indicate that analysts are aware of this pattern of forecasts, and believe that this benefits their future relationships with management and with brokerage clients. The analysts most frequently cite favored conference call participation and information access when describing benefits from maintaining good relationships with management. Our results suggest the following: The optimistic/pessimistic pattern in forecasts is in part a conscious response to relationship incentives, information access is perceived to be a major benefit of management relationships, and recent regulatory changes may have lessened but have not eliminated this conflict of interest source.

Suggested Citation

  • Robert Libby & James E. Hunton & Hun‐Tong Tan & Nicholas Seybert, 2008. "Retracted: Relationship Incentives and the Optimistic/Pessimistic Pattern in Analysts' Forecasts," Journal of Accounting Research, Wiley Blackwell, vol. 46(1), pages 173-198, March.
  • Handle: RePEc:bla:joares:v:46:y:2008:i:1:p:173-198
    DOI: 10.1111/j.1475-679X.2007.00265.x

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    Cited by:

    1. So, Eric C., 2013. "A new approach to predicting analyst forecast errors: Do investors overweight analyst forecasts?," Journal of Financial Economics, Elsevier, vol. 108(3), pages 615-640.
    2. Beyer, Anne & Cohen, Daniel A. & Lys, Thomas Z. & Walther, Beverly R., 2010. "The financial reporting environment: Review of the recent literature," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 296-343, December.
    3. Galanti, Sébastien & Vaubourg, Anne Gaël, 2017. "Optimism bias in financial analysts' earnings forecasts: Do commissions sharing agreements reduce conflicts of interest?," Economic Modelling, Elsevier, vol. 67(C), pages 325-337.
    4. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
    5. Eugene Soltes, 2014. "Private Interaction Between Firm Management and Sell‐Side Analysts," Journal of Accounting Research, Wiley Blackwell, vol. 52(1), pages 245-272, March.
    6. Régis BRETON & Sébastien GALANTI & Christophe HURLIN & Anne-Gaël VAUBOURG, 2011. "Does the firm-analyst relationship matter in explaining analysts' earnings forecast errors?," LEO Working Papers / DR LEO 469, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    7. Li Xu & Alex Tang, 2012. "Internal control material weakness, analysts’ accuracy and bias, and brokerage reputation," Review of Quantitative Finance and Accounting, Springer, vol. 39(1), pages 27-53, July.
    8. Lauren Cohen & Andrea Frazzini & Christopher J. Malloy, 2012. "Hiring Cheerleaders: Board Appointments of "Independent" Directors," Management Science, INFORMS, vol. 58(6), pages 1039-1058, June.
    9. Abraham, Santhosh & Bamber, Matthew, 2017. "The Q&A: Under surveillance," Accounting, Organizations and Society, Elsevier, vol. 58(C), pages 15-31.
    10. Meckfessel, Michele & Moehrle, Stephen, 2017. "Self-regulation of the academic accounting literature: The case of James Hunton," Research in Accounting Regulation, Elsevier, vol. 29(1), pages 10-18.
    11. Lisa M. Gaynor & Andrea S. Kelton, 2014. "The effects of analyst forecasts and earnings trends on perceptions of management forecast credibility," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 54(1), pages 189-210, March.
    12. Jeremy Burke & Angela A. Hung & Jack Clift & Steven Garber & Joanne K. Yoong, 2015. "Impacts of Conflicts of Interest in the Financial Services Industry," Working Papers WR-1076, RAND Corporation.
    13. Anne-Gael Vaubourg & Valdete Berisha-Krasniqui & Sébastien Galanti & Christophe Hurlin & Régis Breton, 2013. "We study whether financial analysts' concern for preserving good relationships with firms' managers motivates them to issue pessimistic or optimistic forecasts. Based on a dataset of one-yearahead EPS," Larefi Working Papers 1304, Larefi, Université Bordeaux 4.
    14. Lawrence D. Brown & Andrew C. Call & Michael B. Clement & Nathan Y. Sharp, 2015. "Inside the “Black Box” of Sell‐Side Financial Analysts," Journal of Accounting Research, Wiley Blackwell, vol. 53(1), pages 1-47, March.
    15. William Baker & Gregory Dumont, 2014. "Equity Analyst Recommendations: A Case for Affirmative Disclosure?," Journal of Consumer Affairs, Wiley Blackwell, vol. 48(1), pages 96-123, March.
    16. Han, Jun, 2013. "A literature synthesis of experimental studies on management earnings guidance," Journal of Accounting Literature, Elsevier, vol. 31(1), pages 49-70.
    17. D. Lowe & Philip Reckers, 2012. "An Examination of the Contribution of Dispositional Affect on Ethical Lapses," Journal of Business Ethics, Springer, vol. 111(2), pages 179-193, December.

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