Handbook of Behavioral Finance
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Handbook of Behavioral Finance

Edited by Brian Bruce

The Handbook of Behavioral Finance is a comprehensive, topical and concise source of cutting-edge research on recent developments in behavioral finance.
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Chapter 11: The Impact of Motivational and Cognitive Factors on Optimistic Earnings Forecasts

Anna M. Cianci and Satoris S. Culbertson


Anna M. Cianci and Satoris S. Culbertson INTRODUCTION Prior research indicates that sell-side analysts’ (SSAs’) earnings forecasts are optimistic (e.g. DeChow et al., 2000; Easterwood and Nutt, 1999; Rajan and Servaes, 1997; Stickel, 1992; Abarbanell, 1991; Ali et al., 1992; Kang et al., 1994; Das et al., 1998; Bathke et al., 1991; Dreman and Berry, 1995; Dugar and Nathan, 1995; Fried and Givoly, 1982; Klein, 1990; O’Brien, 1988; Brav and Lehavy, 2003; Gu and Wu, 2003; Bradshaw et al., 2006; Herrmann et al., 2007). Only one study (Willis, 2001), however, has found that buy-side analysts (BSAs) are also optimistic. Motivational explanations hold that SSAs (but not BSAs) are optimistic in response to incentives to foster management relations, encourage investment banking and underwriting activities, and promote trading commissions (Francis and Philbrick, 1993; Lin and McNichols, 1998; Dugar and Nathan, 1995; Hayes, 1998; Mest and Plummer, 2003). Cognitive explanations, on the other hand, suggest that information processing biases such as under- and overreaction (DeBondt and Thaler, 1990; Easterwood and Nutt, 1999), imaginary thinking (Sedor, 2002) and information processing biases involving base rate neglect and missing information inferences (White and Koehler, 2004; Braun and Yaniv, 1992; Kahneman and Tversky, 1973; Kalish, 2001) may contribute to optimism. Almost all of the research on analysts’ optimism is market-based research using archival data, while only a few take an experimental approach (e.g. Ashton and Cianci, 2007; Sedor, 2002; Affleck-Graves et al., 1990; Whitecotton, 1996). Of the experimental studies, none has examined how motivational and cognitive factors...

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