The Effects of True and Perceived Ability on Analysts' Forecasting Behavior

35 Pages Posted: 17 Oct 2001

See all articles by Qi Chen

Qi Chen

Duke University - Fuqua School of Business

Wei Jiang

Columbia University - Columbia Business School, Finance; ECGI; NBER

Date Written: October 2001

Abstract

We model the existence of an equilibrium in which analysts adopt a threshold reporting strategy to convey their forecasting ability. Under this strategy, an analyst issues a forecast only if the realized value of her private signal exceeds a threshold value. Higher-ability analysts choose higher threshold levels than lower-ability analysts, and the market correctly interprets all analysts' forecasts. Our model produces implications for using sample mean squared forecast error to measure analysts' ability, offers alternative explanation for the observed bias in analysts' forecasts, and produces testable predictions concerning analysts' decisions to follow a firm and to issue forecasts for firms they follow.

Keywords: analysts' forecasting behavior, threshold reporting strategy, Bayesian Nash equilibrium

JEL Classification: G24, G29, M41, D82

Suggested Citation

Chen, Qi and Jiang, Wei, The Effects of True and Perceived Ability on Analysts' Forecasting Behavior (October 2001). Available at SSRN: https://ssrn.com/abstract=287233 or http://dx.doi.org/10.2139/ssrn.287233

Qi Chen

Duke University - Fuqua School of Business ( email )

Box 90120
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(919) 660-7753 (Phone)

Wei Jiang (Contact Author)

Columbia University - Columbia Business School, Finance ( email )

3022 Broadway
New York, NY 10027
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(212) 854-5553 (Phone)

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