Confirmation Bias in Analysts’ Response to Consensus Forecasts

This paper provides evidence of confirmation bias by sell-side analysts in their earnings forecasts. We show that analysts tend to put higher weight on public information when the current forecast consensus is more consistent with their previous forecasts. We further find that analysts with better past forecasting performance, longer firm-specific experience, or forecasting earlier, tend to be more subject to confirmation bias, consistent with some of the existing cognitive and social psychology theories. The results remain significant after controlling for analyst incentives. Finally, we distinguish evidence of confirmation bias from that of other important behavioral biases such as conservative bias.