Long-term earnings growth forecasts: investor sentiment or valuation difficulty?

Purpose This article analyzes the hypothesis that analysts issue higher long-term earnings growth (LTG) forecasts following a market-wide investor sentiment. Design/methodology/approach This study analyzed 193 publicly traded Brazilian firms listed on B3 (Brasil, Bolsa, Balcão), totaling 2,291 observations. To address the potential selection bias resulting from analysts' preference for more liquid firms, this study used the Heckman model in the analysis with samples with only one analyst and the entire sample. The study also applied other robustness tests to ensure the reliability of the findings. Findings The results suggest that market-wide investor sentiment influences LTG when the firm's stocks are difficult to value. Market optimism did not reflect five-year profit growth after the forecast issue, suggesting lower forecast accuracy during high investor sentiment values. Practical implications Volatile-earnings firms have relevant implications in LTG forecasts during bullish moments. According to the study’s evidence, investors' decisions and policymakers' and regulators' rules should consider analysts' expertise as independent information when considering LTG as input for valuation models, even under market optimism. Originality/value This paper contributes to the literature on the influence of investor sentiment on analysts' forecasts by incorporating two crucial elements in the discussion: the scenario free from herding behavior, as usually only one analyst issues LGT forecast for Brazilian firms, and the analysis of research hypotheses incorporates the difficulty of pricing a firm given the uncertainty of its earnings as an explanation to bullish forecast.