Analysts' Herding Propensity: Theory and Evidence from Earnings Forecasts

Abstract

We model and estimate analysts' herding propensity with I/B/E/S annual earnings forecast data. Compared to prior studies, our paper has three unique features. First, we estimate analysts' true posterior beliefs of a firm's earnings assuming rational expectations rather than using analysts' own prior forecasts. Second, we estimate analysts' herding propensity at aggregate and the analyst levels rather than the forecast level. Third, we perform out-of-sample rather than in-sample tests on the usefulness of our herding propensity estimates. We document pervasive herding behavior. At the aggregate level, we find that herding propensity is positively related to forecast horizon and analyst coverage, but negatively related to analysts' general experience and brokerage size. At the analyst level, we find that about 75% (15%) of the analysts in our sample tend to herd (anti-herd). Moreover, our in-sample herding propensity estimates are useful in explaining the cross-sectional variation in analysts' out-of-sample herding behavior and forecast accuracy.