Are Analyst Forecast Errors Really Kinky?
Abstract
The distribution of analyst forecast errors exhibits a well-known "kink"—a disproportionate frequency of small positive earnings surprises relative to small misses—widely attributed to managerial earnings management. We show that approximately 66% of this asymmetry is instead attributable to analyst strategic behavior. Analysts systematically under-revise earnings forecasts while issuing directionally consistent target price and recommendation revisions in the same report, a practice we term bundling. Using out-of-sample industry-year coefficients to remove the predictable forecast bias associated with bundling, we find the ratio of small positive to small negative forecast errors falls from 2.43 to 1.49. Bundling intensity predicts earnings surprises at both the report and firm-quarter levels, and intensifies during periods of macroeconomic uncertainty. Firms with higher analyst bundling rely less on discretionary accruals to meet or beat forecasts, suggesting analyst-induced bias and earnings management are substitutes. These findings imply that studies using meet-or-beat indicators as proxies for earnings management are partially capturing analyst strategic behavior.
