Bearish Analysts and the Issuance of Difficult-to-Beat Earnings Forecasts

Prior research finds that sell-side analysts are generally willing partners with company management in facilitating the consistent meeting or beating of earnings expectations. We examine analysts who demonstrate the opposite behavior: issuing an unusually optimistic earnings forecast at the end of the year that increases the likelihood of an earnings miss. We first identify a set of analysts whose unfavorable stock recommendations suggest a pessimistic outlook on the firm, and define a difficult-to-beat forecast as a final earnings forecast prior to the earnings announcement that exceeds even the most optimistic forecast issued by any other analyst covering the stock. We find that 11% of all firm-year observations are subject to at least one such forecast, and that these forecasts increase the likelihood that a firm misses the consensus forecast by 21%. However, the market reaction to a negative earnings surprise is muted when an analyst has issued a difficult-to-beat forecast