Analysts’ accrual-related over-optimism: do analyst characteristics play a role?

Abstract

Bradshaw et al. (J Acc Res 39:45-74, 2001) find that analyst forecast over-optimism is greater for firms with high accruals. This ''accrual-related overoptimism'' is generally interpreted as evidence that analyst forecasts do not fully incorporate predictable earnings reversals associated with high accruals. We investigate whether analyst experience, access to resources (brokerage size), and portfolio complexity moderate the relation between over-optimistic forecasts and high accruals. We demonstrate the robustness of accrual-related over-optimism to controls for cash flow and prior forecast errors. We find that accrual-related overoptimism is lower for analysts with greater general experience and for analysts following fewer firms but find only limited evidence of lower accrual-related overoptimism for analysts from larger brokerages and for analysts following fewer industries.

Management Forecast Consistency

“…Therefore, the effect of consistency on the usefulness of management forecasts should be affected by the ability (sophistication) of investors and analysts to understand the systematic bias introduced by managers. Prior research suggests that institutional investors are more sophisticated than retail investors (Boehmer and Kelley [], Campbell, Ramadorai, and Schwartz [], Puckett and Yan []), and that analysts with greater experience forecast earnings more accurately (Mikhail, Walther, and Willis [], Clement [], Jacob, Lys, and Neale []) and are less overoptimistic regarding accruals (Drake and Myers []). Our hypotheses rely on the assumption that users behave in a Bayesian fashion and understand the importance of consistency in forecasting, an ability that we would expect to be more common among sophisticated, experienced users .…”

Analyst expertise and the value of cash holdings

“…Prior studies suggest that analysts’ skills and knowledge improve over time. While higher general experience leads to better analysis of financial statements and recognizing economic trends, higher firm‐specific experience could allow analysts to better understand the idiosyncrasies of a particular firm's information (Clement, ; Clement & Tse, , ; Drake & Myers, ; Mikhail et al., ). We measure analysts’ general experience as the number of years through year t for which analyst i supplied at least one forecast for any firm.…”

“…Analysts who follow fewer firms can spend more time in a given firm and are more likely to develop a good relationship with management to access firm‐specific information. Furthermore, analysts who follow fewer industries are more likely to be specialized in a given industry as they can devote more attention to the industry and gain industry‐specific knowledge (Clement, ; Drake & Myers, ). We measure analyst firm coverage as the number of firms covered by analyst i who issues a forecast for firm j in year t .…”

“…Consistent with this view, prior studies find that analysts’ firm‐specific experience is not associated with forecast boldness (as against herding forecasts) (Clement & Tse, ) and forecast accuracy in the post‐Reg FD period (Keskek, Myers, Omer, & Shelley, ). Drake and Myers () find no evidence that analysts with greater firm‐specific experience exhibit lower accrual‐related forecast optimism.…”

Analyst revenue forecast reporting and the quality of revenues and expenses

“…Bradshaw et al. (), Drake and Myers (), Hughes et al. (), and Lobo, Song, and Stanford () employ accruals based measures of earnings quality and observe an inverse association between earnings quality and analyst earnings forecast errors.…”