Does Affiliation Bias Analyst Long-Term Earnings Growth Forecasts?

Abstract

We study long-term earnings growth (LTG) forecasts around seasoned equity offerings. We document that LTG forecasts for firms with fewer analysts are generally higher than forecasts for firms with more analysts covering the stock. In contrast to prior studies, we find no difference between LTG forecasts of affiliated analysts who work for investment banks that have relationships with equity issuing firms and those of unaffiliated analysts. Further analysis shows that aggregation bias influences the prior studies' conclusion that affiliated analysts make more optimistic LTG forecasts. Both affiliated and unaffiliated analyst forecasts are more optimistic for firms with fewer analysts. In addition, the number of unaffiliated analysts relative to the number of affiliated analysts covering the same firm increases with the firm's analyst coverage. As a result, the mean forecast bias of unaffiliated analysts turns out to be lower than the mean forecast bias of affiliated analysts. However, this observed difference in mean forecast bias is driven by analyst coverage rather than analyst affiliation.