Self-selection bias in consensus analysts' earnings forecasts

Self-selection arises when analysts choose not to release earnings forecasts if unfavorable future prospects are expected. This behavior makes the observed distribution of earnings forecasts appear overoptimistic. By using two firm specific measures of the degree of self-selection, I provide evidence suggesting that some portion of observed optimism stems from self-selection, rather than from incentives or analysts' underreaction. Firms experiencing financial distress, low long-term growth, and stock price declines appear more likely to be subject to self-selection by analysts. Moreover, I find empirical evidence suggesting that investors do not fully recognize self-selection and overprice firms which are dropped by analysts.