What makes financial analysts so optimistic about their forecasts?

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Insights from research at HEC Lausanne-UNIL ’ It is commonly recognized that financial analysts tend to be too optimistic when forecasting stock prices, but why is it the case? That’s the question Prof. Alain Schatt from HEC Lausanne (UNIL) and his co-authors decided to tackle in a recent research project.

“Buy”, “Sell” or “Hold” stocks are the main recommendations made by financial analysts known as sell-side analysts. They therefore play a decisive role in investment decisions and movements in stock prices and, by extension, in initial public offerings of private companies or compensation packages for executive seniors.

In the long run, it is clear however that the average implied stock returns suggested by the target prices (i.e. theoretical future share prices) disclosed by analysts will be higher than the actual market returns. It is therefore extremely important for investors and other stakeholders to know what drives this excessive optimism.

What if the answer lays simply in the way the human brain processes large and small numbers, with a higher risk of optimism for small-priced stocks?

Get to know more about:

  • Prof. Alain Schatt : Alain Schatt is Full Professor of Financial Accounting at HEC Lausanne, University of Lausanne. His research focuses on financial reporting, corporate governance and the audit market. In particular, he is interested in the consequences of specific regulations on audit quality and on the value of public firms.
  • The Department of Accounting and Control 's research covers areas such as auditing, tax systems, management and cost control. It aims at understanding the growing complexity of national and international accounting systems.