Are Analysts Overly Optimistic Around Earnings Strings?

Abstract

Firms that report consecutive earnings increases, called earnings strings, receive an overvaluation from the stock market. We examine whether the presence of earnings strings affects equity research analysts’ opinions beyond company fundamentals. We find that analysts issue more optimistic forecasts and more favorable stock recommendations for firms that report earnings strings and that this bias results in lower forecast accuracy. The bias is greater for longer strings, less skillful analysts, and for firms with poor information environment. Furthermore, we find that management guidance increases the cognitive bias around earnings strings.