The joint effects of psychological distance and counterexplanation on analysts' forecast optimism

Management-provided scenarios emphasize a chain of causal events that create an optimistic bias in financial analysts' earnings forecasts. Prompting analysts to generate counterexplanations of managements's plans tempers optimism. Construal Level Theory from the social psychology literature suggests that cues of psychological distance within management scenarios will reduce analyst optimism as well. Using an experiment with 67 professional sell-side equity analysts and 43 Master of Business Administration students substituting for professional analysts, I find support for my prediction that the effectiveness of counterexplanations as a debiasing mechanism is greatest when management scenarios contain cues of psychological distance. Supplemental analyses suggest that the effect of psychological distance on analyst optimism is partially mediated by the quantity of counterexplanations generated.