The ability of analysts’ recommendations to predict optimistic and pessimistic forecasts

Previous researches show that buy (growth) companies conduct income increasing earnings management in order to meet forecasts and generate positive forecast Errors (FEs). This behavior however, is not inherent in sell (non-growth) companies. Using the aforementioned background, this research hypothesizes that since sell companies are pressured to avoid income increasing earnings management, they are capable, and in fact more inclined, to pursue income decreasing Forecast Management (FM) with the purpose of generating positive FEs. Using a sample of 6553 firm-years of companies that are listed in the NYSE between the years 2005–2010, the study determines that sell companies conduct income decreasing FM to generate positive FEs. However, the frequency of positive FEs of sell companies does not exceed that of buy companies. Using the efficiency perspective, the study suggests that even though buy and sell companies have immense motivation in avoiding negative FEs, they exploit different but efficient strategies, respectively, in order to meet forecasts. Furthermore, the findings illuminated the complexities behind informative and opportunistic forecasts that falls under the efficiency versus opportunistic theories in literature

Results for the Management Forecast Bias Hypothesis (Hypothesis 1).

<p>Logistic regression results of the first and second subsamples. The coefficients and related t-statistics are estimated by using the following model: <i>Prob(Down = 1) = F(α₀+α₁ AR+α₂AR×Difficulty+α₃AR×FREQ+α₄ LMV+α₅ MB+α₆ Hightech+α₇ Lag_Loss+ε).</i></p>*, **,***<p>Significant at 0.1, 0.05 and 0.01 levels, respectively based on one-tailed tests for signed predictions, two-tailed tests otherwise.</p

Correlation Matrices and Factor Loadings for Forecast Difficulty Measure.

*, **<p>Significant at 5% and 1% level.</p