How well do analysts really understand asymmetric cost behaviour?

Abstract

Prior literature suggests analysts have a very poor understanding of asymmetric cost behaviour (‘ACB’) and ‘converge to the average’ when incorporating this behaviour in forecasts. However, we show that the extent of bias arising from sticky costs is greater for firms (‘Defenders’) employing strategic approaches for which ACB is less commonly observed, and that ACB typically has no association with forecast errors for firms who typically demonstrate high degrees of cost stickiness (‘Prospectors’). Our findings are consistent with analysts having a meaningful understanding of ACB and cross-sectional differences in the likelihood of its incidence.