Rationality and Analysts' Forecast Bias

摘要

This paper proposes and tests a quadratic-loss utility function for modeling corpo- rate earnings forecasting, where financial analysts trade off bias to improve man- agement access and forecast accuracy. Optimal forecasts with minimum expected error are optimistically biased and exhibit predictable cross-sectional variation re- lated to analyst and company characteristics. Empirical evidence from individual analyst forecasts is consistent with the model's predictions. These results suggest that positive and predictable bias may be a rational property of optimal earnings forecasts. Prior studies using classical notions of unbiasedness may have pre- maturely dismissed analysts' forecasts as being irrational or inaccurate.