Coexistence and Dynamics of Overconfidence and Strategic Incentives

K. Bosquet, P. C. de Goeij, K. Smedts

Research output: Working paperDiscussion paperOther research output

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Abstract

We present a two-stage model for the decision making process of financial analysts when issuing earnings forecasts. In the first stage, financial analysts perform a fundamental earnings analysis in which they are, potentially, subject to a behavioral bias. In the second stage analysts can adjust their earnings forecast in line with their strategic incentives. The paper analyzes this decision process throughout the forecasting period and explains the underlying drivers. Using quarterly earnings forecasts, we document that throughout the entire forecasting period financial analysts overweight their private information. At the same time, financial analysts behave strategically. They issue initial optimistic forecasts by strategically inflating their forecast. In their last revision, they become pessimistic and strategically deflate their earnings forecast, which creates the possibility of a positive earnings surprise. This analysis of the dynamics of the decision process provides empirical evidence on the coexistence of overconfidence and strategic incentives.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages42
Volume2009-81
Publication statusPublished - 2009

Publication series

NameCentER Discussion Paper
Volume2009-81

Fingerprint

Earnings forecasts
Overconfidence
Incentives
Financial analysts
Coexistence
Decision process
Two-stage model
Earnings surprises
Behavioral biases
Analysts
Empirical evidence
Decision-making process
Private information

Keywords

  • Financial analysts
  • Earnings Forecasts
  • Overconfidence
  • Conflicts of interest

Cite this

Bosquet, K., de Goeij, P. C., & Smedts, K. (2009). Coexistence and Dynamics of Overconfidence and Strategic Incentives. (CentER Discussion Paper; Vol. 2009-81). Tilburg: Finance.
Bosquet, K. ; de Goeij, P. C. ; Smedts, K. / Coexistence and Dynamics of Overconfidence and Strategic Incentives. Tilburg : Finance, 2009. (CentER Discussion Paper).
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Bosquet, K, de Goeij, PC & Smedts, K 2009 'Coexistence and Dynamics of Overconfidence and Strategic Incentives' CentER Discussion Paper, vol. 2009-81, Finance, Tilburg.

Coexistence and Dynamics of Overconfidence and Strategic Incentives. / Bosquet, K.; de Goeij, P. C.; Smedts, K.

Tilburg : Finance, 2009. (CentER Discussion Paper; Vol. 2009-81).

Research output: Working paperDiscussion paperOther research output

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AB - We present a two-stage model for the decision making process of financial analysts when issuing earnings forecasts. In the first stage, financial analysts perform a fundamental earnings analysis in which they are, potentially, subject to a behavioral bias. In the second stage analysts can adjust their earnings forecast in line with their strategic incentives. The paper analyzes this decision process throughout the forecasting period and explains the underlying drivers. Using quarterly earnings forecasts, we document that throughout the entire forecasting period financial analysts overweight their private information. At the same time, financial analysts behave strategically. They issue initial optimistic forecasts by strategically inflating their forecast. In their last revision, they become pessimistic and strategically deflate their earnings forecast, which creates the possibility of a positive earnings surprise. This analysis of the dynamics of the decision process provides empirical evidence on the coexistence of overconfidence and strategic incentives.

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Bosquet K, de Goeij PC, Smedts K. Coexistence and Dynamics of Overconfidence and Strategic Incentives. Tilburg: Finance. 2009. (CentER Discussion Paper).