Horizon-Dependent Underreaction in Financial Analysts' Earnings Forecasts PDF Download
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Author: Jana Smith Raedy
Publisher:
ISBN:
Category :
Languages : en
Pages : 33
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Book Description
This paper provides empirical evidence that underreaction in financial analysts' earnings forecasts increases with the forecast horizon, and the paper offers a rational economic explanation for this result. The empirical portion of the paper evaluates analysts' responses to earnings-surprise and other earnings-related information. Our empirical evidence suggests that analysts' earnings forecasts underreact to both types of information, and the underreaction increases with the forecast horizon. The paper also develops a theoretical model that explains this horizon-dependent analyst underreaction as a rational response to an asymmetric loss function. The model assumes that, for a given level of inaccuracy, analysts' reputations suffer more (less) when subsequent information causes a revision in investor expectations in the opposite (same) direction as the analyst's prior earnings forecast revision. Given this asymmetric loss function, underreaction increases with the risk of subsequent disconfirming information and with the disproportionate cost associated with revision reversal. Assuming that market frictions prevent prices from immediately unraveling these analyst underreaction tactics, investors buying (selling) stock based on analysts' positive (negative) earnings forecast revisions also benefit from analyst underreaction. Therefore, the asymmetric cost of forecast inaccuracy could arise from rational investor incentives consistent with a preference for analyst underreaction. Our incentives-based explanation for underreaction provides an alternative to psychology-based explanations and suggests avenues for further research.
Author: Jana Smith Raedy
Publisher:
ISBN:
Category :
Languages : en
Pages : 33
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Book Description
This paper provides empirical evidence that underreaction in financial analysts' earnings forecasts increases with the forecast horizon, and the paper offers a rational economic explanation for this result. The empirical portion of the paper evaluates analysts' responses to earnings-surprise and other earnings-related information. Our empirical evidence suggests that analysts' earnings forecasts underreact to both types of information, and the underreaction increases with the forecast horizon. The paper also develops a theoretical model that explains this horizon-dependent analyst underreaction as a rational response to an asymmetric loss function. The model assumes that, for a given level of inaccuracy, analysts' reputations suffer more (less) when subsequent information causes a revision in investor expectations in the opposite (same) direction as the analyst's prior earnings forecast revision. Given this asymmetric loss function, underreaction increases with the risk of subsequent disconfirming information and with the disproportionate cost associated with revision reversal. Assuming that market frictions prevent prices from immediately unraveling these analyst underreaction tactics, investors buying (selling) stock based on analysts' positive (negative) earnings forecast revisions also benefit from analyst underreaction. Therefore, the asymmetric cost of forecast inaccuracy could arise from rational investor incentives consistent with a preference for analyst underreaction. Our incentives-based explanation for underreaction provides an alternative to psychology-based explanations and suggests avenues for further research.
Author: Daniel Kreutzmann
Publisher: Logos Verlag Berlin GmbH
ISBN: 3832525297
Category : Business & Economics
Languages : en
Pages : 141
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Book Description
This thesis focuses on the three primitive value drivers of each company valuation model that is based on fundamental analysis: the discount rate, the expected future payoffs during the explicit forecasting period, and the terminal value at the end of the explicit forecasting period. While the first factor is analyzed theoretically by incorporating the government into the classical valuation framework, this thesis studies the other two factors by investigating forecasts made by professional investors, i.e. financial analysts. In the first part we show that the government's and the shareholders discount rate usually differ and analyze how the government's and shareholders different objectives lead to conflicts in the context of capital budgeting. The empirical part of this thesis shows that macroeconomic information is frequently used by financial analysts when updating their earnings expecations and that target price forecastsmade by financial analysts can be used to predict abnormal returns.
Author: Peter A. Brous
Publisher:
ISBN:
Category :
Languages : en
Pages : 26
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Book Description
Prior research suggests that financial analysts' earnings forecasts and stock prices underreact to earnings news. This paper provides evidence that analysts and investors correct this underreaction in response to the next earnings announcement and to other (non-earnings-surprise) information available between earnings announcements. Our evidence also suggests that analysts and investors underreact to information reflected in analysts' earnings forecast revisions and that non-earnings-surprise information helps correct this underreaction as well. Controlling for corrective non-earnings-surprise information significantly increases estimates of the degree to which analysts' forecasting behavior can explain drifts in returns following both earnings announcements and analysts' earnings forecast revisions.
Author: Dimitris Kenourgios
Publisher:
ISBN:
Category :
Languages : en
Pages : 20
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Book Description
This paper presents an analysis of two forms of overreaction (generalized overreaction and overreaction to prior earnings changes) in analysts' earnings forecasts for the UK stock market, using a sample of individual forecasts of earning per share from a British investment bank over the period 1989-2002. Given that previous UK empirical research over 1980s and mid '90s has provided limited and contradictory findings, we investigate whether and how overreaction of analysts forecasts varies across forecast horizons, firm size (small and large) and growth opportunities (high and low P/E ratio) in order to provide further and comparable evidence. Overall, our findings support the generalized overreaction hypothesis but reject the firm size effect, the overreaction for high P/E ratio companies and the higher overreaction regarding the forecasting horizon.
Author:
Publisher:
ISBN:
Category : Economics
Languages : en
Pages : 664
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Book Description
Author: Véronique Bessière
Publisher:
ISBN:
Category :
Languages : en
Pages : 21
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Book Description
The financial markets crash, which occurred March-April 2000 has aroused suspicion about financial analysts' forecasts accuracy which could have made them more cautious, perhaps pessimistic about future performance. This article investigates the possibility of recent behavioral changes by examining analysts' reactions to good and bad news before and after the crash. We analyze the interaction between over- and under-reaction and the optimistic bias following Easterwood and Nutt (1999)'s methodology. If the crash leads analysts to be less prone to optimism (or even pessimism), we might observe weaker underreaction (or possibly overreaction) to bad news and weaker overreaction (or possibly underreaction) to good news. Our results indicate a strong decrease in optimism after the crash. The tendency to produce overly positive and moderately negative revisions or forecasted changes diminishes or reverses. Reactions to new information are consistent with a reduction in optimism: analysts' systematic underreaction to negative information strongly decreases after the crash. Overreaction to positive information, less pronounced before the crash, is also weakened.
Author: Konrad E. Gunderson
Publisher:
ISBN:
Category :
Languages : en
Pages : 194
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Book Description
Author: Simon Hussain
Publisher:
ISBN:
Category : Capital market
Languages : en
Pages : 27
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Book Description
Author: Mikhail Pevzner
Publisher:
ISBN:
Category :
Languages : en
Pages : 46
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Book Description
We examine whether the properties of earnings forecasts - bias and dispersion are different across periods when macroeconomic forecasts are optimistic than non-optimistic, and whether this difference in analyst forecast optimism is stronger during recessionary periods. We find that the long-horizon earnings forecasts are more optimistically biased in periods when the macroeconomic forecasts are optimistically biased as well, and the bias is more pronounced during periods of recession. We also find that the long-horizon earnings forecast dispersion is lower in periods when the long-horizon macroeconomic forecasts are optimistic than in other periods. These results suggest that firms that meet or beat earnings forecasts when there is no recession and macroeconomic forecast is optimistic are likely to have opportunistically biased their long-term forecasts and walked them down, i.e. opportunistic; and that firms that meet or beat earnings forecasts when there is recession and macroeconomic forecast is optimistic are likely to be the ones that are positioned to perform well when the economy recovers. Consistent with this we find that premium for meeting or beating the analysts' earnings forecasts is highest in periods when there is recession and macroeconomic forecasts are optimistic; and there is no premium when there is no recession and macroeconomic forecast is optimistic. Collectively, the results show the interaction between the macroeconomic outlook and firm-level forecast properties.
Author: Jeffery S. Abarbanell
Publisher:
ISBN:
Category :
Languages : en
Pages : 52
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Book Description
We demonstrate the role of three empirical properties of cross-sectional distributions of analysts' forecast errors in generating evidence pertinent to three important and heretofore separately analyzed phenomena studied in the analyst earnings forecast literature: purported bias (intentional or unintentional) in analysts' earnings forecasts, forecaster over/underreaction to information in prior realizations of economic variables, and positive serial correlation in analysts' forecast errors. The empirical properties of interest include: the existence of two statistically influential asymmetries found in the tail and the middle of typical forecast error distributions, the fact that a relatively small number of observations comprise these asymmetries and, the unusual character of the reported earnings benchmark used in the calculation of the forecast errors that fall into the two asymmetries that is associated with firm recognition of unexpected accruals. We discuss competing explanations for the presence of these properties of forecast error distributions and their implications for conclusions about analyst forecast rationality that are pertinent to researchers, regulators, and investors concerned with the incentives and judgments of analysts.Previously titled quot;Biased Forecasts or Biased Earnings? The Role of Earnings Management in Explaining Apparent Optimism and Inefficiency in Analysts' Earnings Forecastsquot.
