Research On The Causes Of Optimism In Financial Analysts' Earnings Forecasts

Financial Analysts are usually served in the brokerages, funds, and securities advisory institutions. They collect a variety of data and information of listed companies, apply professional knowledge in analysis and research, and provide earnings forecasts and investment advice for investors. Earnings forecasts information is one of the main service content that analysts provide for clients, and is one of the important ways by which they deliver information to the market. The characteristics of earnings forecasts, such as accuracy, have a direct impact on investors'valuation, and also affect the efficiency of the allocation of resources in capital markets. So this dissertation focuses on analysts'earnings forecasts, takes optimism in earnings forecasts as the object, and tries to find the causes of optimism in order to provide new perspectives and ideas for improving the validity of the information in securities market.It is of the theoretical significance and practical value to research on the causes of optimism in analysts'earnings forecasts in China. In theory, the foreign scholars, who are engaged in finding causes of optimism in analysts'earnings forecasts, always ignored the fact that the optimism is the result of a variety of factors. As a result, they didn't immerge further into the combined effects of conflicts of interest and cognitive bias. While Chinese scholars even didn't research on the causes of optimism in the perspective of analysts' earnings forecasts bias, therefore a complete research system is failed to be formed. In this dissertation, the mechanism of analysts'optimism is clarified, the theoretical framework is constructed to combine the impacts on optimism in analysts'earnings forecasts of conflict of interest and cognitive bias, and the framework is verified through empirical tests. The dissertation improves the research on causes of optimism in analysts'earnings forecasts to a certain extent, and is of great significance for researches on analysts'earnings forecasts.In practice, researches on the causes of optimism in financial analysts'earnings forecasts is of reference value and practical significance for providers, users and policy-makers of financial analysts'earnings forecasts. Firstly, there is a certain distance between accuracy of analysts'earnings forecasts in China and the international level. The researches on causes of optimism could help analysts to guide their behavior and improve forecast accuracy accordingly. Secondly, the researches could help investors to judge forecast provided by analysts more scientificly, and make better investment decisions. Finally, the researches could help policy-makers to perform its monitoring functions better, strengthen the analyst industries, protect investors, and enhance capital market efficiency of resource allocation.Taking China's capital market as research background, this dissertation takes the causes of optimism in financial analysts'earnings forecasts as the research objective, and engages to construct a theoretical framework to explain the causes of optimism and verify the framework by empirical research. Specifically, the author wants to gradually achieve three research goals in this dissertation:Goal 1, construct explain framework for causes of optimism in financial analysts'earnings forecasts. Goal 2, provide empirical evidence for explain framework. Goal 3,make policy recommendations for reducing the optimism.Specially speaking, the research design of this dissertation spreads in turn according to the four progressive levels. The first level is the research basement. In this level, relevant literature is reviewed, sources of relevant theories are found, and the research background is made clearly. The second level is the theoretical analysis.In this level, the basic theory of research on causes of optimism in financial analysts'earnings forecasts is discussed, the mechanism of optimism is analyzed, the explain framework of causes of optimism is constructed. The third level is the empirical testing. The empirical evidence of framework of causes of optimism is provided. The fourth level is the conclusions and recommendations.Based on the above-mentioned research logic, this dissertation consists of eight parts.The first part is the introduction. In this part, some basic issues in the dissertation are mainly discussed, including the research background, the theoretical value and practical application value of this dissertation, the basic ideas and method, and main research contents.The second part is the literature summary. The previous literatures about analysts' earnings forecasts are summaried in this part. The literature summary is focused on the literatures about the causes of optimism in analyst's earnings forecasts.The problems and limitations in previous literatures are summarized, and the useful inspiration in previous research is discussed. So we can obtain some clues for the research. The third part is about the basic theory. No one question can exist in isolation, therefore, in order to research on causes of optimism in financial analysts'earnings forecasts scientificly, we should not only trace theories sources of analysts'earnings forecasts, but also recognize the practical background. In this part, the relevant theoretical basis is discussed firstly, including the efficient market theory, asymmetric information theory, and behavioral finance theory.The fourth part is about the theoretical analysis of causes of optimism in analysts' earnings forecasts.In this part, the explain framework of cause of optimism in financial analysts'earnings forecasts in China is constructed in normative research paradigm. Financial analysts faced the conflict of interest in the institutional environment, which is the root of optimism. The main forms of conflict of interest are economic incentives and management relationships. Cognitive bias of financial analysts is worked like catalyst, which exacerbates the optimism. And the causes of conflict of interest and cognitive bias are analyzed, in order to indicate the direction of who to reduce the optimism.The fifth part, the sixth part, and the seventh part are about empirical tests.The author tests the impact that economic incentives, management relationships and cognitive bias have on optimism in financial analysts'earnings forecasts with the empirical method. These three parts are the core of this dissertation, the corresponding empirical evidence is provided based on theoretical analysis. The data in the test for economic incentives and the management relationships is from document. While experimental research method is used in the test of cognitive bias.The eighth part is about conclusions and expectations.First of all, sum up the above theoretical researches and empirical tests. Secondly, make policy recommendations for reduce the impact of economic incentives, management relationships and cognitive bias according to the conclusions, including improving the construction of the industry, the disclose fair of listed companies and analyst self-awareness. Finally, sum up the contributions and shortcomings of this dissertation and looks forward to the follow-up research.The previous research on causes of optimism in financial analysts'earnings forecasts is very extensive. Innovations and contributions in this dissertation are as follows. Firstly, the previous researchers only discussed what influence a single factor or dimension had on optimism in financial analysts'earnings forecasts. The influence that conflict of interest and cognitive bias have on optimism in financial analysts'earnings forecasts is merged in this dissertation with the thinking of analyzing from the external to internal, and gradually relaxing the assumption. Secondly, the previous research was taken the United States, Britain and other developed countries as the background, while this dissertation is the first one researches the issue of optimism in financial analysts' earnings forecasts taken financial analysts in China as the background. The research not only enriches the research content of financial analysts'earnings forecasts in China, but also broadens the research on financial analysts'earnings forecasts under different contexts. Thirdly, most of the existing literatures argue that analysts'overreaction/underreaction to historical and new earnings information manifest the cognitive bias, while this point of view is called into question in this dissertation. We propose a new view that the cognitive bias in financial analysts' earnings forecasts includes heuristic bias, framing bias, and confirmation bias. The cognitive bias makes the optimism exacerbated.