IDEAS home Printed from https://ideas.repec.org/p/hal/wpaper/halshs-00829908.html
   My bibliography  Save this paper

Does soft information matter for financial analysts' forecasts? A gravity model approach

Author

Listed:
  • Régis Breton

    (LEO - Laboratoire d'économie d'Orleans [2008-2011] - UO - Université d'Orléans - CNRS - Centre National de la Recherche Scientifique, Centre de recherche de la Banque de France - Banque de France)

  • Sébastien Galanti

    (LEO - Laboratoire d'économie d'Orleans [2008-2011] - UO - Université d'Orléans - CNRS - Centre National de la Recherche Scientifique)

  • Christophe Hurlin

    (LEO - Laboratoire d'économie d'Orleans [2008-2011] - UO - Université d'Orléans - CNRS - Centre National de la Recherche Scientifique)

  • Anne-Gaël Vaubourg

    (LEO - Laboratoire d'économie d'Orleans [2008-2011] - UO - Université d'Orléans - CNRS - Centre National de la Recherche Scientifique)

Abstract

We study whether the financial analysts' concern to maintain good relationships with firms' managers in order to preserve their access to 'soft' qualitative information entice them to issue pessimistic or optimistic forecasts. We use a gravity model approach to firmsanalysts relationships and propose a measure of soft information. Our database contains the one-year ahead EPS forecasts issued by 4 648 analysts about 241 French firms (1997-2007). We find that a low (high) pair-effect is associated with a low (high) forecast error. This suggests that pessimism and optimism result from analysts' concern to preserve access to soft information released by managers.

Suggested Citation

  • Régis Breton & Sébastien Galanti & Christophe Hurlin & Anne-Gaël Vaubourg, 2011. "Does soft information matter for financial analysts' forecasts? A gravity model approach," Working Papers halshs-00829908, HAL.
    • Handle: RePEc:hal:wpaper:halshs-00829908
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00829908v1
    as

    Download full text from publisher

    File URL: https://shs.hal.science/halshs-00829908v1/document
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. David Burgstahler & Michael Eames, 2006. "Management of Earnings and Analysts' Forecasts to Achieve Zero and Small Positive Earnings Surprises," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(5-6), pages 633-652.
    2. Womack, Kent L, 1996. "Do Brokerage Analysts' Recommendations Have Investment Value?," Journal of Finance, American Finance Association, vol. 51(1), pages 137-167, March.
    3. Barber, Brad M. & Lehavy, Reuven & Trueman, Brett, 2007. "Comparing the stock recommendation performance of investment banks and independent research firms," Journal of Financial Economics, Elsevier, vol. 85(2), pages 490-517, August.
    4. David Burgstahler & Michael Eames, 2006. "Management of Earnings and Analysts' Forecasts to Achieve Zero and Small Positive Earnings Surprises," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(5‐6), pages 633-652, June.
    5. Fogarty, Timothy J. & Rogers, Rodney K., 2005. "Financial analysts' reports: an extended institutional theory evaluation," Accounting, Organizations and Society, Elsevier, vol. 30(4), pages 331-356, May.
    6. Breusch, Trevor & Ward, Michael B. & Nguyen, Hoa Thi Minh & Kompas, Tom, 2011. "On the Fixed-Effects Vector Decomposition," Political Analysis, Cambridge University Press, vol. 19(2), pages 123-134, April.
    7. Patricia C. O'Brien & Maureen F. Mcnichols & Lin Hsiou‐Wei, 2005. "Analyst Impartiality and Investment Banking Relationships," Journal of Accounting Research, Wiley Blackwell, vol. 43(4), pages 623-650, September.
    8. Terence Lim, 2001. "Rationality and Analysts' Forecast Bias," Journal of Finance, American Finance Association, vol. 56(1), pages 369-385, February.
    9. Andrew R. Jackson, 2005. "Trade Generation, Reputation, and Sell‐Side Analysts," Journal of Finance, American Finance Association, vol. 60(2), pages 673-717, April.
    10. Mundlak, Yair, 1978. "On the Pooling of Time Series and Cross Section Data," Econometrica, Econometric Society, vol. 46(1), pages 69-85, January.
    11. Clement, Michael B., 1999. "Analyst forecast accuracy: Do ability, resources, and portfolio complexity matter?," Journal of Accounting and Economics, Elsevier, vol. 27(3), pages 285-303, July.
    12. Yu, Fang (Frank), 2008. "Analyst coverage and earnings management," Journal of Financial Economics, Elsevier, vol. 88(2), pages 245-271, May.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. 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.
    2. 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.
    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. Ramnath, Sundaresh & Rock, Steve & Shane, Philip, 2008. "The financial analyst forecasting literature: A taxonomy with suggestions for further research," International Journal of Forecasting, Elsevier, vol. 24(1), pages 34-75.
    5. Chune Young Chung & Euisup Lee & Chang-Gyun Park, 2020. "Do Ownership Ties Increase the Optimistic Bias of Analysts’ Earnings Estimates? Evidence from Corporate Financing in the Korean Market," Sustainability, MDPI, vol. 12(11), pages 1-20, June.
    6. Andreas Charitou & Irene Karamanou, 2020. "Sleeping with the enemy: should investment banks be allowed to engage in prop trading?," Review of Accounting Studies, Springer, vol. 25(2), pages 513-557, June.
    7. 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.
    8. Altınkılıç, Oya & Balashov, Vadim S. & Hansen, Robert S., 2019. "Investment bank monitoring and bonding of security analysts’ research," Journal of Accounting and Economics, Elsevier, vol. 67(1), pages 98-119.
    9. Juyoun Ryoo & Cheolwoo Lee & Jin Q Jeon, 2020. "Sustainability of Analyst Recommendations in Multiple Lead Underwriter IPOs," Sustainability, MDPI, vol. 12(5), pages 1-36, March.
    10. Brown, Anna Bergman & Lin, Guoyu & Zhou, Aner, 2022. "Analysts’ forecast optimism: The effects of managers’ incentives on analysts’ forecasts," Journal of Behavioral and Experimental Finance, Elsevier, vol. 35(C).
    11. Sébastien GALANTI, 2008. "When the payment mode affects the quality of advices. Financial analysts, fund managers, and brokerage commissions," LEO Working Papers / DR LEO 1767, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    12. Thabang Mokoaleli-Mokoteli & Richard J. Taffler & Vineet Agarwal, 2009. "Behavioural Bias and Conflicts of Interest in Analyst Stock Recommendations," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(3-4), pages 384-418.
    13. Wang, Ying & Liu, Zisen, 2024. "Under the dome: Air pollution and analyst forecast optimism," Research in International Business and Finance, Elsevier, vol. 70(PA).
    14. Cheolwoo Lee, 2013. "Analyst firm parent–subsidiary relationship and conflict of interest: evidence from IPO recommendations," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 53(3), pages 763-789, September.
    15. Rees, Lynn & Sharp, Nathan Y. & Wong, Paul A., 2017. "Working on the weekend: Do analysts strategically time the release of their recommendation revisions?," Journal of Corporate Finance, Elsevier, vol. 45(C), pages 104-121.
    16. Roger K. Loh & René M. Stulz, 2018. "Is Sell‐Side Research More Valuable in Bad Times?," Journal of Finance, American Finance Association, vol. 73(3), pages 959-1013, June.
    17. Thabang Mokoaleli‐Mokoteli & Richard J. Taffler & Vineet Agarwal, 2009. "Behavioural Bias and Conflicts of Interest in Analyst Stock Recommendations," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(3‐4), pages 384-418, April.
    18. 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.
    19. Johan Sulaeman & Kelsey D. Wei, 2019. "Sell-Side Analysts and Stock Mispricing: Evidence from Mutual Fund Flow-Driven Trading Pressure," Management Science, INFORMS, vol. 65(11), pages 5427-5448, November.
    20. Ljungqvist, Alexander & Marston, Felicia & Starks, Laura T. & Wei, Kelsey D. & Yan, Hong, 2007. "Conflicts of interest in sell-side research and the moderating role of institutional investors," Journal of Financial Economics, Elsevier, vol. 85(2), pages 420-456, August.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hal:wpaper:halshs-00829908. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CCSD (email available below). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.