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?