Prior Uncertainty, Analyst Bias, and Subsequent Abnormal Returns PDF Download

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Prior Uncertainty, Analyst Bias, and Subsequent Abnormal Returns

Prior Uncertainty, Analyst Bias, and Subsequent Abnormal Returns PDF Author: Lucy F. Ackert
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In this paper, we examine the relation between analysts' over-optimism and uncertainty as proxied by the standard deviation of earnings forecasts. We find a positive relation between over-optimism and uncertainty, but very little or no optimism when uncertainty is low. If the uncertainty surrounding a firm is high, analysts have fewer reputational concerns when they act on their inclinations to issue optimistic forecasts. Portfolio strategies based on these findings generate abnormal returns. The results suggest that greater prior uncertainty leads to higher analyst optimism, which in turn causes market overvaluation and profitable portfolio strategies.