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Journal of Accounting, Auditing and Finance 29, 3 (2014) 367-392
We examine analysts’ forecast behavior in a setting in which CEOs are optimistic and analysts react rationally to CEO optimism. We document that the bias in analysts’ consensus forecasts is negatively related to the level of CEO optimism. The negative relation is stronger for small firms, firms with low analyst followings, and firms with high uncertainty. Analysts revise downward their forecasts for next year’s earnings less relative to their revision for current year’s earnings for firms with more optimistic CEOs, a result consistent with optimistic CEOs are subject to self-attribution bias. The stock price reactions to downward forecast revisions and missing analysts’ forecasts are less negative for firms with optimistic CEOs, indicating that investors understand the implications of CEO optimism for analysts’ forecast bias and subsequent revisions.