The extensive literature that investigates whether analysts’ earnings forecasts are biased and/or inefficient has produced conflicting evidence and no definitive answers to either question. This paper shows how two relatively small but statistically influential asymmetries in the tail and the middle of distributions of analysts’ forecast errors can exaggerate or obscure evidence consistent with analyst bias and inefficiency, leading to inconsistent inferences. We identify an empirical link between firms’ recognition of unexpected accruals and the presence of the two asymmetries in distributions of forecast errors that suggests that firm reporting choices play an important role in determining analysts’ forecast errors.

This paper analyzes the distribution of stock ratings at investment banks and brokerage firms and examines whether these distributions can predict the profitability of analysts’ recommendations. We document that the percentage of buys decreased steadily starting in mid-2000, likely due, at least partly, to the implementation of NASD Rule 2711, requiring the public dissemination of ratings distributions. Additionally, we find that a broker's ratings distribution can predict recommendation profitability. Upgrades to buy (downgrades to hold or sell) issued by brokers with the smallest percentage of buy recommendations significantly outperformed (underperformed) those of brokers with the greatest percentage of buys.