The informationally constrained analyst: The impact of inferential beliefs on analysts' decision processes

This study focuses on financial analysts' decision-making processes when predicting future financial data when firm-specific information is absent. Three hypotheses concerning inference making were examined using financial analysts within a sales prediction task where the prior-period relationship between intra-industry firms and the consistency of forecasted information were manipulated. In addition, written protocols were gathered and analysts completed a survey which provided additional evidence on inference making.;The results indicate that forecasted information provided by intra-industry firms had a significant effect on analysts' sales predictions. Empirical evidence indicates analysts appeared to engage in an averaging form of inference making when inconsistent information was available. Analysis of written protocols confirm this effect and indicate that a similar effect took place when information was consistent. Although the experiment did not confirm the hypothesis that the strength of the relationship between historical information of intra-industry firms affects an analysts' prediction of sales, survey results and written protocol analysis indicate analysts do use a firm's historical data and information from other firms within an industry to infer absent information. Empirical results also indicate that analysts were less confident in their sales prediction when the prior-period relationship was weak as opposed to strong. Analysts were, however, no less confident in their sales prediction when forecasted information was inconsistent rather than consistent.