Analystss Reluctance to Voice Conservative Opinions and the Informational Value of Long-Term Earnings Growth Forecasts

Abstract

The extant research indicates that analysts’ long-term earnings growth forecasts are especially optimistic for past winners, and have little predictive power to distinguish between high-growth and low-growth firms. In explaining the poor informational value of analysts’ long-term earnings growth forecasts, studies have focused on the excessively aggressive forecasts induced by analysts’ inflation of their true beliefs. This study reveals that the forecasts’ poor informational value is driven by analysts’ reluctance to voice conservative opinions rather than analysts’ inflation of their true beliefs. We predict that this reluctance allows each firm’s conservative forecast to be heavily influenced by the firm’s past performance and allows the noisy predictors to distinguish high-growth firms from low-growth ones. Consistent with our prediction, we find that each firm’s most conservative forecasts are those most strongly influenced by past performance and have the least predictive power.