The Forecast Accuracy of Individual Analysts Evidence of Systematic Optimism and Pessimism

1. Introduction
O'Brien [I9901 examines the annual earnings forecast accuracy of
individual analysts reporting to the Institutional Brokers Estimate System
(IBES)of Lynch, Jones and Ryan during July 1975-September 1982.
Using a regression model which adjusts for average firm and year effects,
O'Brien finds no evidence of differential forecast accuracy. Comparing
individual analysts' earnings forecasts to median consensus forecasts
during 1983-86, we also find no statistically significant evidence of
differential analyst forecast accuracy.
Our result, however, does not mean that one analyst's forecasts are
much like another's. We find that analysts are persistently optimistic or
pessimistic relative to consensus forecasts. We examine this persistent
behavior and its effect on measures of forecast accuracy over a sampleperiod in which analyst forecasts consistently overestimate actual
earnings.
Our sample consists of forecasts of annual earnings for 49 firms with
December year-ends selected from the top 65 firms in the December 1986
Fortune index. Firms undergoing stock splits, stock dividends, or mergers
are omitted. Individual analysts7 forecasts of current-year primary earnings
per share before extraordinary items (IBES field "FYI") and the
analysts7 self-reported forecast dates were provided by Lynch, Jones and
Ryan for 30 of the 48 months during 1983-86. Forecasts reported to
IBES on a diluted basis are changed to primary EPS according to the
ratio of fully diluted EPS to primary EPS in Compustat. Compustat is
also the source of earnings and share price data. Empirical results focus
on the 9,120 forecasts of 186 analysts providing at least three earnings
estimates in each sample year.