Man versus Machine Learning: The Term Structure of Earnings Expectations and Conditional Biases

Abstract We introduce a real-time measure of conditional biases to firms’ earnings forecasts. The measure is defined as the difference between analysts’ expectations and a statistically optimal unbiased machine-learning benchmark. Analysts’ conditional expectations are, on average, biased upward, a bias that increases in the forecast horizon. These biases are associated with negative cross-sectional return predictability, and the short legs of many anomalies contain firms with excessively optimistic earnings forecasts. Further, managers of companies with the greatest upward-biased earnings forecasts are more likely to issue stocks. Commonly used linear earnings models do not work out-of-sample and are inferior to those analysts provide. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.