Do investor expectations affect sell-side analysts' forecast bias and forecast accuracy?

Beverly R. Walther, Richard H. Willis

Research output: Contribution to journalArticlepeer-review

65 Scopus citations


We examine the association between investor expectations and its components and sell-side analysts' short-run quarterly earnings forecast bias and forecast accuracy. To measure investor expectations, we use the Index of Consumer Expectations survey and decompose it into the "fundamental" component related to underlying economic factors (FUND) and the "sentiment" component unrelated to underlying economic factors (SENT). We find that analysts are the most optimistic and the least accurate when SENT is higher. Management long-horizon earnings forecasts attenuate the effects of SENT on forecast optimism and forecast accuracy. Analysts are also the most accurate when FUND is higher. Last, the market places more weight on unexpected earnings when SENT is high. These findings suggest that analysts are affected by investor sentiment and the market reacts more strongly to unexpected earnings when analyst forecasts are the least accurate. The last result potentially explains why prior research (for example, Baker and Wurgler, The Journal of Finance 61:1645-1680, 2006) finds an association between investor sentiment and cross-sectional stock returns.

Original languageEnglish (US)
Pages (from-to)207-227
Number of pages21
JournalReview of Accounting Studies
Issue number1
StatePublished - Mar 2013


  • Forecast accuracy
  • Forecast bias
  • Investor sentiment
  • Market reaction
  • Security analysts

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting(all)


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