In our paper, Bias and Efficiency: A Comparison of Analyst Forecasts and Management Forecasts, we compare the forecast characteristics of analyst forecasts and management forecasts. Frequently, analysts and managers provide similar type of information to investors, namely forecasts. Since managers and analysts have different incentives and different information sets, we empirically test whether those differences are manifested in their forecast characteristics. Specifically, we compare the bias, a systematic deviation of management and analyst EPS forecasts from the actual realized EPS, and efficiency, the ability of managers and analysts to incorporate prior publicly available information in their forecasts.
When comparing management forecasts and analyst forecasts, it is important to consider the implications of the difference in incentives and information available to analysts and managers. Since prior literature documents an optimistic bias in analyst forecasts, we expect that, given management incentives and cognitive biases, management forecasts will be at least as biased as analyst forecasts. In addition, since companies’ managers are exposed to private information, we expect management forecasts to better incorporate prior available information.
We find several striking results. First, we find that prior stock returns do not predict management forecast errors while they predict analyst forecast errors. Furthermore, while we find an optimistic bias in a broad sample of both management forecasts and analyst forecasts, the optimistic bias in analyst forecasts disappears in months in which management forecasts are issued. The bias is still apparent for these firms when managers do not provide forecasts.