Conservatism and the Apparent Analyst Optimistic Bias

The apparent analyst optimistic bias is partly driven by the asymmetric accounting treatments of gains and losses. Relative to bad news, good news has a negative (marginal) effect on analyst forecast errors and revisions. Specifically, the positive association between stock returns and forecast errors is less pronounced for firms with positive returns than for those with negative returns. Similarly, the positive association between stock returns and forecast revisions is less pronounced for firms with positive returns. The forecasted earnings capitalization factor also increases over the forecasting period and the increase is strongly associated with good news. These results are particularly strong when news-unrelated conservatism is high, and partly explain both the apparent optimistic bias in the initial earnings forecast and the subsequent walk-down of the forecast toward the reported earnings number.