Bearish Analysts and the Issuance of 'Unbeatable' Earnings Forecasts

We examine whether bearish analysts issue unusually optimistic earnings forecasts (i.e., “unbeatable forecasts”) at the end of the year in an effort to increase the likelihood that a firm misses earnings expectations. We identify a sample of analysts with unfavorable stock recommendations whose final earnings forecast prior to the earnings announcement exceeds even the most optimistic earnings forecast issued by any other analyst covering the stock. For the period 2004 through 2018, we find that 11.7% of all firm-year observations are subject to at least one such unbeatable forecast. Bearish analysts are more likely to issue these forecasts when they have greater pressure to defend their negative view of the stock and when the strategy is more likely to revise investor beliefs. Although unbeatable forecasts are upward revisions, stock returns associated with these optimistic forecasts are relatively unfavorable. While these forecasts are often excluded from the consensus earnings forecast published by Thomson Reuters, they nevertheless increase the likelihood that the firm misses the consensus earnings estimate by about 21%. Finally, we find that the market reaction to a negative (positive) earnings surprise is muted for firms when an analyst has issued an unbeatable forecast.