Consistent Analyst Expectation Error and Earnings Management : Evidence from China

Using data from the Chinese A-share market in 2004-2012, this paper shows how cognitive bias of individual analysts lead to counter-productive effect in less-developed financial markets. We form an ex-ante measure of analysts' expectation error, a measure suitable for markets with short history. Then we find that star analysts tend to be more optimistic than ordinary analysts, and their biased opinions influence other analysts because of analyst herding behavior. Two-stage-least-square regression results suggest that consistent expectation errors among analysts can lead to earnings management. These insights are valuable to investors and regulators