How (Over) Conﬁdent Are Financial Analysts?
Journal of Behavioral Finance, Volume 19 (3), 308-318, 2017
Posted: 27 Dec 2019
Date Written: December 15, 2017
Extensive research has been devoted to the quality of analysts’ earnings forecasts. The common ﬁnding is that analysts’ forecasts are not very accurate. Prior studies have tended to focus on the mean of forecasts and measure accuracy using various summaries of forecast errors. The present study sheds new light on the accuracy of analysts’ forecasts, by measuring how well calibrated these forecasts are. The authors follow the tradition of calibration studies in psychological literature and measure the degree of calibration by the hit rate. They analyze a year’s worth of data from the Institutional Brokers Estimate System database, which includes over 200,000 annual earnings forecasts made by over 6,000 analysts for over 5,000 companies. By using different ways to convert analysts’ point estimates of earnings into a range of values, the authors establish the bounds that are necessary to determine the hit rates, and examine to what extent the actual earnings announced by the companies are bracketed by these intervals. These hit rates provide a more complete picture of the accuracy of the forecasts.
Keywords: Financial analyst; Earning forecasts; Overconﬁdence; Judgment and decision making; Calibration
JEL Classification: G02
Suggested Citation: Suggested Citation