Do investors recognize biases in securities analysts’ forecasts?

Abstract

AbstractThis study presents direct evidence on the question whether investors recognize the widely documented biases in securities analysts’ earnings forecasts. The internal rate of return implied by current stock price and consensus earnings forecast is found to be correlated with indicators of bias in a manner consistent with investors discounting optimistic earnings forecasts at higher rates of return and less optimistic forecasts at lower rates of return. In a departure from studies of excess returns, the evidence in implied returns indicates that investors recognize the biases in analysts’ earnings forecasts.