The Best of Times, the Worst of Times : Testing Which Behavioural Biases Affect Analyst Forecasts

Mood-induced optimism, cognitive inaccuracy, and distraction can affect analyst forecasts. This study compares and contrasts these influences. The novelty of our approach is that we first show that these behavioural biases have different implications for analysts' forecast errors conditioned on the errors being positive and negative. We then use proxies for positive and negative moods to empirically test the support for each of these biases. Consistent with cognitive precision, we find that analysts make less (more) accurate forecasts when they are in positive (negative) moods. We further show that these results are driven neither by sentiment associated with contemporaneous economic or market conditions nor by under- or over-reaction to more bad news released on days immediately before weekends or holidays