An Analysis Of Behavioral Finance Of Securities Analysts On Earnings Forecast Of Listed Companies

One of the security analyst’s major jobs is to provide the earnings forecasts of the public companies. The classical finance theory is built on the theories like EMH and CAPM, and it has a very important assumption that the market participants are rational. So if the classical theory works, the analysts would make the earnings forecasts based on their understandings about the fundamental factors about the public companies and other market conditions, which has nothing to do with the irrational things. However, the assumption about rational person is too strong to be true. The major job of this paper is try to find out the irrational side of the analysts’work and also tries to use the behavioral finance theories to explain these phenomena.The paper tries to use both the vertical view and horizontal view to discuss the problem. From the vertical view, we try to discuss whether the analyst’s this year’s earnings forecasts would be affected by his last year’s forecast outcomes. We find out there exists the negative relationship between analyst’s this year’s estimation errors and last year’s. The phenomenon may be explained by "anchoring effect", which belongs to a behavioral finance concept. The anchoring effect tells us that the analysts may set their last year’s forecasting outcome as this year’s reference point to start this year’s job. And from the horizontal view, we try to discuss whether the analyst’s forecast outcomes would be affected by other analysts. We respectively use the star analysts who ranked first tier last year and the analysts who made the forecasts earliest as different benchmarks to discuss the problem. We find out that the so-called star analyst’s forecasting outcomes would affect others’forecast outcomes, but the analysts who made the forecasts earliest would not show the same effect. The "herding effect", one of the behavioral finance concepts, may be helpful here to explain this phenomenon. It is quite obvious here that the star analyst acts as the leading sheep, and other analysts act as the following sheep, which would follow the leading one.There are three conclusions we can get from the paper. First, the forecasting of the analysts are not one-hundred percent rational. Second, the analysts would keep eyes on their former forecasting outcomes, which would affect this times forecast. Third, some analysts may have significant effects on others, especially the so-called star analysts.