Coexistence and Dynamics of Overconfidence and Strategic Incentives

CentER Discussion Paper Series No. 2009-81

42 Pages Posted: 25 Oct 2009 Last revised: 18 Mar 2010

See all articles by Katrien Bosquet

Katrien Bosquet

KU Leuven - Faculty of Business and Economics (FEB)

Peter de Goeij

Tilburg University

Kristien Smedts

KU Leuven - Faculty of Business and Economics (FEB)

Multiple version iconThere are 3 versions of this paper

Date Written: October 20, 2009

Abstract

We present a two-stage model for the decision making process of financial analysts when issuing earnings forecasts. In the first stage, financial analysts perform a fundamental earnings analysis in which they are, potentially, subject to a behavioral bias. In the second stage analysts can adjust their earnings forecast in line with their strategic incentives. The paper analyzes this decision process throughout the forecasting period and explains the underlying drivers. Using quarterly earnings forecasts, we document that throughout the entire forecasting period financial analysts overweight their private information. At the same time, financial analysts behave strategically. They issue initial optimistic forecasts by strategically inflating their forecast. In their last revision, they become pessimistic and strategically deflate their earnings forecast, which creates the possibility of a positive earnings surprise. This analysis of the dynamics of the decision process provides empirical evidence on the coexistence of overconfidence and strategic incentives.

Keywords: financial analysts, earnings forecasts, overconfidence, conflicts of interest

JEL Classification: G14, G17, G24

Suggested Citation

Bosquet, Katrien and de Goeij, Peter and Smedts, Kristien, Coexistence and Dynamics of Overconfidence and Strategic Incentives (October 20, 2009). CentER Discussion Paper Series No. 2009-81, Available at SSRN: https://ssrn.com/abstract=1492128 or http://dx.doi.org/10.2139/ssrn.1492128

Katrien Bosquet (Contact Author)

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Peter De Goeij

Tilburg University ( email )

P.O. Box 90153
Room I607
Tilburg, Noord-Brabant 5000 LE
Netherlands
+31134662083 (Phone)

Kristien Smedts

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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