Is There Safety in Numbers? The Effects of Forecast Accuracy and Forecast Boldness on Financial Analysts' Credibility with Investors

This paper reports the results of an experiment that examines how analyst forecast accuracy (i.e., how close an analyst's forecast is to realized earnings) and forecast boldness (i.e. how far the analyst's forecast is from the consensus forecast) affect the analyst's perceived credibility and investors' willingness to rely on and purchase the analyst's future reports. We hypothesize and find that forecast boldness generally magnifies the effect of forecast accuracy on these variables. That is, analysts who provide accurate, bold forecasts generally experience more positive consequences than those who provide accurate, non-bold forecasts, and analysts who provide inaccurate, bold forecasts experience more negative consequences than those who provide inaccurate, non-bold forecasts. We also find that these effects are not symmetric - the negative consequences of being bold and inaccurate exceed the positive consequences of being bold and accurate. This asymmetry helps explain why analysts are hesitant to deviate from the consensus forecast (i.e., why analysts herd)