Analyzing the Analysts: Career Concerns and Biased Earnings Forecasts

This paper examines the career concerns of security analysts. We relate long histories of their earnings forecasts to job separations. We find that relatively accurate past forecasts lead to favorable career outcomes such as remaining at or moving up to a high status (large, prestigious) brokerage house. Controlling for accuracy, optimistic forecasts relative to the consensus increase the chances of favorable job separations. Job separations depend much less on accuracy for analysts who cover stocks that are underwritten by their brokerage houses. Such analysts are also much more likely to be rewarded for optimistic forecasts than other analysts. Furthermore, job separations were much less sensitive to accuracy and somewhat more sensitive to optimism during the stock market mania of the late 1990s. These findings suggest that the well-documented analyst forecast optimism bias is likely due to incentives to promote stocks. ______________________________ We thank I/B/E/S for making their data available for academic use. We thank Rick Green (the Editor) and an anonymous referee as well as Steven Grenadier and Ezra Zuckerman for many helpful comments