Tuesday, January 20, 2015 | 2:00pm–3:30pm | Room 335, HSBC Business School Building

Abstract

This paper examines the real effects of outliers' opinions in the context of extreme analyst optimism and corporate governance. Using earnings forecasts issued by sell-side analysts between 1991 and 2011, we construct a proxy to capture two essential traits of an outlier's opinion—being markedly distinct from the others and coming from an individual instead of a cohort of agents. We show that when an analyst issues extremely optimistic forecasts that drastically deviate from peer consensus, there is a greater tendency on the part of firms to manage earnings. The arrival of an outlier forecast gives rise to the optimism of peer analysts and generates stronger reactions from investors. Further analyses suggest that private information and conflict of interest are less likely to explain the effect of extreme analyst optimism on earnings management; instead, an analyst’s self-motivated incentives are at play.