Coexistence and Dynamics of Overconfidence and Strategic Incentives

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

Research output: Working paperDiscussion paperOther research output

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 positiveearnings 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
PublisherTILEC
Number of pages42
Volume2009-039
Publication statusPublished - 2009

Publication series

NameTILEC Discussion Paper
Volume2009-039

Fingerprint

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

Keywords

  • Financial analysts
  • Earnings Forecasts
  • Overconfidence
  • Conflicts

Cite this

Bosquet, K., de Goeij, P. C., & Smedts, K. (2009). Coexistence and Dynamics of Overconfidence and Strategic Incentives. (TILEC Discussion Paper; Vol. 2009-039). Tilburg: TILEC.
Bosquet, K. ; de Goeij, P. C. ; Smedts, K. / Coexistence and Dynamics of Overconfidence and Strategic Incentives. Tilburg : TILEC, 2009. (TILEC Discussion Paper).
@techreport{e8470fd2410f4bb7ad2428861ea8ff79,
title = "Coexistence and Dynamics of Overconfidence and Strategic Incentives",
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 positiveearnings surprise. This analysis of the dynamics of the decision process provides empirical evidence on the coexistence of overconfidence and strategic incentives.",
keywords = "Financial analysts, Earnings Forecasts, Overconfidence, Conflicts",
author = "K. Bosquet and {de Goeij}, {P. C.} and K. Smedts",
note = "Pagination: 42",
year = "2009",
language = "English",
volume = "2009-039",
series = "TILEC Discussion Paper",
publisher = "TILEC",
type = "WorkingPaper",
institution = "TILEC",

}

Bosquet, K, de Goeij, PC & Smedts, K 2009 'Coexistence and Dynamics of Overconfidence and Strategic Incentives' TILEC Discussion Paper, vol. 2009-039, TILEC, Tilburg.

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

Tilburg : TILEC, 2009. (TILEC Discussion Paper; Vol. 2009-039).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

T1 - Coexistence and Dynamics of Overconfidence and Strategic Incentives

AU - Bosquet, K.

AU - de Goeij, P. C.

AU - Smedts, K.

N1 - Pagination: 42

PY - 2009

Y1 - 2009

N2 - 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 positiveearnings surprise. This analysis of the dynamics of the decision process provides empirical evidence on the coexistence of overconfidence and strategic incentives.

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 positiveearnings surprise. This analysis of the dynamics of the decision process provides empirical evidence on the coexistence of overconfidence and strategic incentives.

KW - Financial analysts

KW - Earnings Forecasts

KW - Overconfidence

KW - Conflicts

M3 - Discussion paper

VL - 2009-039

T3 - TILEC Discussion Paper

BT - Coexistence and Dynamics of Overconfidence and Strategic Incentives

PB - TILEC

CY - Tilburg

ER -

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