Confirmation Bias in Analysts’ Response to Consensus Forecasts

2020 CIRF & CFRI Joint Conference

49 Pages Posted: 2 Nov 2020

See all articles by Huan Cai

Huan Cai

Shantou University - Business School

Tong Yao

University of Iowa - Henry B. Tippie College of Business

Xiaodi Zhang

Shanghai University of Finance and Economics

Date Written: August 10, 2020

Abstract

This paper provides evidence of confirmation bias by sell-side analysts in their earnings forecasts. We show that analysts tend to put higher weight on public information when the current forecast consensus is more consistent with their previous forecasts. Our results further suggest that the effect of confirmation bias on analyst forecasts is distinct from that of conservatism, self-attribution bias, or overconfidence. We find that analysts with better forecasting performance, shorter experience following a firm, providing earlier forecasts, or facing more dispersion in peer forecasts, tend to be less subject to confirmation bias, consistent with existing cognitive and social psychology theories.

Keywords: Confirmation Bias, Analyst Earnings Forecasts, Weighting Inefficiency, Behavioral Finance

JEL Classification: G02, G2

Suggested Citation

Cai, Huan and Yao, Tong and Zhang, Xiaodi, Confirmation Bias in Analysts’ Response to Consensus Forecasts (August 10, 2020). 2020 CIRF & CFRI Joint Conference, Available at SSRN: https://ssrn.com/abstract=3691119

Huan Cai

Shantou University - Business School ( email )

China

Tong Yao

University of Iowa - Henry B. Tippie College of Business ( email )

Acquisitions
5020 Main Library
Iowa City, IA 52242-1000
United States

Xiaodi Zhang (Contact Author)

Shanghai University of Finance and Economics ( email )

School of Finance
Shanghai
China

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