Abstract
This paper provides experimental evidence about the differences between buy-side analyst (BSA) and sell-side analyst (SSA) earnings forecasts, and investigates both motivational and cognitive determinants of these differences. Regarding motivational determinants, we argue that the SSA work environment contains greater incentives for optimistic forecasts than does the BSA work environment. Regarding cognitive determinants, we examine whether three characteristics of the information on which analysts base their forecasts (trend, variability, and recency) contribute to optimism. We also examine whether forecasts are more optimistic over longer forecast horizons. Results indicate that, as expected, SSAs make more favorable earnings forecast revisions than BSAs, and, consistent with prior research, analyst forecasts are greater as forecast horizon increases. In addition, while information variability does not contribute to optimism, differences in trend and recency do. Specifically, analysts act as if they discount both past earnings information with a decreasing trend and negative recent information when revising their forecasts. Directions for additional research on motivational and cognitive determinants of analyst forecasts are offered.
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