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A framework for analyst economic incentives and cognitive biases: Origination of the walk-down in earnings forecasts

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  • Chen, Xiaomeng Charlene
  • Hellmann, Andreas
  • Sood, Suresh

Abstract

This paper discusses potential mechanisms for a walk-down pattern in analysts’ earnings forecasts attributable to economic incentives signalling favour from managers. We put forward that impression management tactics exploiting analysts’ subconscious cognitive biases influence judgements and forecasting processes. Hence, we suggest a framework addressing the interplay of analysts’ economic incentives and subconscious cognitive biases yielding forecast walk-downs. This paper is an important step toward enhancing the understanding of how forecasting processes are subject to subconscious cognitive biases and explicit incentives to please managers. Finally, we provide signposts for future research using experimental settings on the interplay of analysts’ incentives and cognitive biases, helping unpack the biases at play

Suggested Citation

  • Chen, Xiaomeng Charlene & Hellmann, Andreas & Sood, Suresh, 2022. "A framework for analyst economic incentives and cognitive biases: Origination of the walk-down in earnings forecasts," Journal of Behavioral and Experimental Finance, Elsevier, vol. 36(C).
    • Handle: RePEc:eee:beexfi:v:36:y:2022:i:c:s2214635022000818
    DOI: 10.1016/j.jbef.2022.100759
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    More about this item

    Keywords

    Earnings forecasts; Analysts’ incentives; Cognitive biases; Forecast walk-downs; Multimodal biometrics; Judgements;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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