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Analysts’Optimism and Selection Bias

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  • Antonio Lopo Martinez

    (Federal University of Bahia)

Abstract

This paper is an empirical examination, drawing on the Institutional Brokers Estimate System (I/B/E/S) database, of analysts’ earnings forecast optimism for Brazilian companies. The study found that analysts were optimistic on average and performed poorly in terms of precision and accuracy. The study period was January 1995 to December 2002. The forecasting errors in one period were correlated with the errors of the following period. There was evidence of persistent consensus errors among analysts, with those who were persistently optimistic outweighing those who were persistently pessimistic. A possible explanation for this predominant overoptimism is selection bias. In order to adjust analysts’ consensus forecasts, an optimization methodology is suggested, providing results that minimize the optimism bias. The evidence presented is relevant, especially for those using analysts’ earnings forecasts as an input in their stock valuation models.

Suggested Citation

  • Antonio Lopo Martinez, 2007. "Analysts’Optimism and Selection Bias," Brazilian Business Review, Fucape Business School, vol. 4(2), pages 103-113, May.
    • Handle: RePEc:bbz:fcpbbr:v:4:y:2007:i:2:p:103-113
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    Cited by:

    1. Almeida, José Elias Feres de & Dalmácio, Flávia Zóboli, 2015. "The Effects of Corporate Governance and Product Market Competition on Analysts' Forecasts: Evidence from the Brazilian Capital Market," The International Journal of Accounting, Elsevier, vol. 50(3), pages 316-339.

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