An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Frank Zhang
Yale University

Franco Wong
University of Chicago

Abstract: This paper examines whether optimistic managers induce bias in analysts’ forecasts in a setting in which security analysts are rational. We find that the eight-month-ahead consensus forecast is biased upward and that the bias is positively related to the level of managerial optimism. This relation is weaker for large firms and for firms with extensive analysts following, consistent with managers exerting less influence on analysts if the firms are operating in a rich information environment. We also document that analysts revise their forecasts for current year’s earnings downward more but revise next year's earnings less for companies with optimistic managers, suggesting that managers remain optimistic about their companies’ futures. Finally, we show that investors understand the implications of managerial optimism for analysts’ forecast bias and subsequent revisions.

Back to Session Listing

AAA Home Page