Does Exploration Intensity Affect Analyst Forecast Bias?

This study examines whether exploration and evaluation (E&E) expenditures are associated with bias in analysts forecasts. We find that analyst forecast pessimism increases with the intensity of E&E activities. We also find that analysts private information development acquisitions mediate the effect of exploration intensity on analyst forecast bias, but the extent of competition among analysts is not a mediating factor. The results suggest that analysts issue biased forecasts to gain access to management of firms with substantial E&E activities. Additional analyses reveal that firms capability of generating revenues from production activities is a viable mechanism for constraining analysts strategically biasing behavior. Effective enforcement is needed to prevent the inequity of information access among market participants, particularly in the extractive industries.