Reference no: EM131723779

Question: Buy-side versus sell-side analysts' earnings forecasts. Harvard Business School professors carried out a comparison of earnings forecasts of buy-side and sell-side analysts and published the results in the Financial Analysts Journal (July/August 2008). The professors used regression to model the relative optimism (y) of the analysts' 3-month horizon forecasts. One of the independent variables used to model forecast optimism was the dummy variable x = {1 if the analyst worked for a buy-side firm, 0 if the analyst worked for a sell-side firm}.

(a) Write the equation of the model for E(y) as a function of type of firm.

(b) Interpret the value of β₀ in the model, part a.

(c) The professors write that the value of β₁ in the model, part a, ‘‘represents the mean difference in relative forecast optimism between buy-side and sell-side analysts.'' Do you agree?

(d) The professors also argue that ‘‘if buy-side analysts make less optimistic forecasts than their sell-side counterparts, the [estimated value of β1] will be negative.'' Do you agree?