Patterns of Error and Neglect in Security Analyst Forecasts

It is well documented that firms that are neglected by analysts and large institutions provide superior investment performance. This paper studies whether that effect is caused by an upward bias in analyst earnings forecasts. The idea is that the more popular firms are the ones with the greatest earnings estimation bias. It was found that after controlling for earnings estimation bias the neglect effect was considerably weakened. However, it was also found that there was no relation between analyst following and earnings estimation bias.