Earnings predictability and the direction of analysts' earnings forecast errors

Das et al. (1998) suggest that as earnings become less predictable, analysts issue increasingly optimistic forecasts to please managers and consequently gain, or at least limit the loss of, access to managers' private information. We reexamine the association between earnings forecast error and earnings predictability because there is evidence suggesting that deliberate earnings forecast optimism is not an effective mechanism for gaining access to managers' information (e.g., Eames et al. 2002; Matsumoto 2002). We document associations between earnings level and both forecast error and earnings predictability. These associations suggest that earnings level may be an important control variable when examining the association between forecast error and earnings predictability. When we control for the level of earnings we find no significant association between forecast error and earnings predictability. Thus, we find no evidence that analysts intentionally issue optimistically biased earnings forecasts.