Stock market reactions and optimism bias in analysts’ earnings forecasts: An analysis of China's stock markets

Abstract

This paper examines analysts’ catering behavior to current investor demand, proxied by the unbalanced stock market reaction toward optimistic forecasts and non-optimistic forecasts (i.e., optimism premium). Using data on earnings forecasts issued by sell-side analysts in China from 2014 to 2018, we show that the optimism premium significantly increases analysts’ tendency to issue optimistic forecasts—in short, that analysts do cater to investor demand. The implications of our findings for theory and practices are discussed.