Explaining Analyst Optimism: Credit Cycles, Investor Sentiment and Competition

Abstract

This paper provides an empirical link between analyst optimism and four major credit flows over the period between 1990 and 2012. Using quarterly data obtained from the Institutional Brokers’ Estimate System (I/B/E/S) and the Federal Flow of Funds Accounts, we find that analyst optimism is positively related to the credit cycle. This occurs because increased credit activity, while boosting both analyst EPS forecasts and actual EPS earnings, causes forecasts to rise faster than actual earnings. We also shed new light onto the implications of using different deflators when scaling raw forecast errors.