Finance Cluster Seminar: Professor Paul Irvine
A great number of academic papers evaluate the potential for incentive-driven bias in sell-side analysts earnings forecasts. Yet bias does not necessarily invalidate a forecast, nor does it impinge on its relative quality. We find that analysts forecasts are optimistic relative to recently introduced fundamental alternatives. However, analysts forecasts have lower absolute deviation and the information in their earnings forecasts has predictive value for near-term stock returns. We propose the latter result as a previously unidentified form of earnings momentum. We find that this form of earnings momentum is even stronger for quarterly forecasts than annual forecasts, suggesting that analysts have particularly strong incentives directed to forecasting quarterly earnings. Investing with optimistic analysts is a rational investment strategy, rather than a misguided one, when the investment horizon is less than one year.