A framework for analyst economic incentives and cognitive biases: Origination of the walk-down in earnings forecasts

This paper discusses potential mechanisms for a walk-down pattern in analysts’ earnings forecasts attributable to economic incentives signalling favour from managers. We put forward that impression management tactics exploiting analysts’ subconscious cognitive biases influence judgments judgements and forecasting processes. Hence, we suggest a framework addressing the interplay of analysts’ economic incentives and subconscious cognitive biases yielding forecast walk-downs. This paper is an important step toward enhancing the understanding of how forecasting processes are subject to subconscious cognitive biases and explicit incentives to please managers. Finally, we provide signposts for future research using experimental settings on the interplay of analysts’ incentives and cognitive biases, helping unpack the biases at play