Bearish Analysts and the Issuance of 'Unbeatable' Earnings Forecasts

Abstract

We examine a sample of analysts who, despite having a bearish stock recommendation for a covered firm, issue an unusually optimistic earnings forecast at the end of the year. For the period 2004 through 2018, among analysts with an unfavorable stock recommendation, we find that about 5% issue a final earnings forecast prior to the earnings announcement that exceeds even the most optimistic earnings forecast issued by any other analyst covering the stock, presumably in an effort to increase the likelihood that the firm misses earnings expectations. More than 11% of all firm-year observations are subject to at least one such forecast at the hands of a bearish analyst. We find that analysts with pessimistic stock recommendations are more likely to issue these “difficult-to-beat” earnings forecasts when they have greater pressure to justify their negative view of the stock and when the earnings forecast has greater potential to revise investor beliefs. Nevertheless, stock returns associated with these optimistic forecast revisions are muted. We also find that although Thomson Reuters often excludes these forecasts from the consensus earnings estimate, the majority remain in the consensus and increase the likelihood that the firm misses the consensus forecast by about 21%. However, the market reaction to a negative earnings surprise is less severe when a bearish analyst has issued a difficult-to-beat forecast for the firm. Our study sheds light on one perverse strategy analysts use to increase the likelihood of an earnings miss.