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Author: Anne Beyer
Publisher:
ISBN:
Category :
Languages : en
Pages : 43
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Book Description
This study models the interaction between a sell-side analyst and risk-averse investors. It derives an analyst's optimal earnings forecast and investors' optimal trading decisions in a setting where the analyst's payoff depends on the trading volume the forecast generates as well as on the forecast error. In the fully separating equilibrium, we find that the analyst biases the forecast upward (downward) if his private signal reveals relatively good (bad) news.The model predicts that: (i) the analyst biases the forecast upward more often than downward and the forecast is on average optimistic; (ii) the magnitude of the analyst's bias is increasing in the per share benefit from trading volume he receives; and (iii) the analyst's expected squared forecast error may increase in the precision of his private information. Finally, we characterize the circumstances under which the (rational) analyst acts as if he overweights or underweights his private information.
Author: Anne Beyer
Publisher:
ISBN:
Category :
Languages : en
Pages : 43
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Book Description
This study models the interaction between a sell-side analyst and risk-averse investors. It derives an analyst's optimal earnings forecast and investors' optimal trading decisions in a setting where the analyst's payoff depends on the trading volume the forecast generates as well as on the forecast error. In the fully separating equilibrium, we find that the analyst biases the forecast upward (downward) if his private signal reveals relatively good (bad) news.The model predicts that: (i) the analyst biases the forecast upward more often than downward and the forecast is on average optimistic; (ii) the magnitude of the analyst's bias is increasing in the per share benefit from trading volume he receives; and (iii) the analyst's expected squared forecast error may increase in the precision of his private information. Finally, we characterize the circumstances under which the (rational) analyst acts as if he overweights or underweights his private information.
Author: Tingting Liu
Publisher:
ISBN:
Category :
Languages : en
Pages : 45
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Book Description
We show that understanding the role of analysts' forecast bias is central to discovering the behavior that causes some stocks to have high analyst forecast dispersion. This finding is important because stocks with high analyst forecast dispersion contribute significantly to many important anomalies. We first explain how forecast bias produces significant negative future returns in the high dispersion portfolio. Next we examine the effect of these stocks on momentum returns, the profitability anomaly, and post-earnings announcement drift. Finally, we examine the performance of four asset pricing models focusing on the model's ability to explain the returns to these high dispersion stocks.
Author: Beverly R. Walther
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
We examine the association between investor expectations and its components and sell-side analysts' short-run quarterly earnings forecast bias and forecast accuracy. To measure investor expectations, we use the Index of Consumer Expectations (ICE) survey and decompose it into the “fundamental” component related to underlying economic factors (FUND) and the “sentiment” component unrelated to underlying economic factors (SENT). We find that analysts are the most optimistic and the least accurate when SENT is higher. Management long-horizon earnings forecasts attenuate the effects of SENT on forecast optimism and forecast accuracy. Analysts are also the most accurate when FUND is higher. Last, the market places more weight on unexpected earnings when SENT is high. These findings suggest that analysts are affected by investor sentiment and the market reacts more strongly to unexpected earnings when analyst forecasts are the least accurate. The last result potentially explains why prior research (for example, Baker and Wurgler 2006) finds an association between investor sentiment and cross-sectional stock returns.
Author: Pilar Corredor
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
This paper analyses four key markets within the European context. In this context, where the level of analyst coverage is lower than in the US setting, we aim to ascertain whether the origin of optimism in analyst forecasts in these markets is mainly strategic or whether it also contains an element of cognitive bias. Despite the fact that forecast errors lack the explanatory power to account for a significant percentage of the relationship between market sentiment and future stock returns, our new tests based on selection bias (SB1 and SB2), in conjunction with an analysis of abnormal trading volume, confirm the presence of both cognitive bias and strategic behaviour in analyst forecasts. This shows that, although regulation can reduce analyst optimism bias, the benefits are constrained by the fact that optimism bias is partly associated with cognitive bias.
Author: Anna Scherbina
Publisher:
ISBN:
Category :
Languages : en
Pages : 32
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Book Description
I present evidence of inefficient information processing in equity markets by documenting that biases in analysts' earnings forecasts are reflected in stock prices. In particular, I show that investors fail to fully account for optimistic bias associated with analyst disagreement. This bias arises for two reasons. First, analysts issue more optimistic forecasts when earnings are uncertain. Second, analysts with sufficiently low earnings expectations who choose to keep quiet introduce an optimistic bias in the mean reported forecast that is increasing in the underlying disagreement. Indicators of the missing negative opinions predict earnings surprises and stock returns. By selling stocks with high analyst disagreement institutions exert correcting pressure on prices.
Author: Sami Keskek
Publisher:
ISBN:
Category :
Languages : en
Pages : 44
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Book Description
Prior studies find that analysts tend to bias their forecasts upward in poor information environments and downward in rich information environments, consistent with attempts to curry favor with management. We find that investors anticipate this behavior by reducing their response to upward forecasts in poor information environments and downward forecasts in rich information environments. Using Hugon and Muslu's measure of analyst conservatism as an ex ante indicator of individual analysts' forecast bias tendencies, we show that the stronger return response they find to conservative analysts' forecast revisions is restricted to poor information environments, where optimistic analyst bias is prevalent. Our results suggest that analysts pay a price in market influence when their forecasts reinforce analysts' typical forecast bias for the firm's information environment. Conversely, analysts whose forecasts conflict with the typical bias for the firm are rewarded with larger than average return responses.
Author: Mark T. Bradshaw
Publisher:
ISBN: 9781680833553
Category : Business analysts
Languages : en
Pages : 72
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Book Description
Well-functioning capital markets rely on a complex set of institutions and participants that ensure capital is allocated to its best possible use, and that information flows between firms receiving capital and the investors who provide it. In this manuscript, we endeavor to understand whether, how, and under what circumstances sell-side research contributes to the functioning of capital markets. We review major findings in the literature, address significant regulatory and technological changes, and offer suggestions for future research.
Author: Paul J. Irvine
Publisher:
ISBN:
Category :
Languages : en
Pages : 41
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Book Description
Using unique data on brokerage-firm trading volume, I examine whether analysts' earnings forecasts and recommendations generate trading volume for their brokerage firms. I find that analysts' forecasts differing from the consensus forecast generate signif icant brokerage-firm volume in the forecast stocks for two weeks after the forecast release date, consistent with analysts' forecasts affecting their brokers' commission revenue. I find that buy recommendations generate relatively more trading, both buyin g and selling, through the analyst's brokerage firm. I find no evidence that analysts' forecast errors, the difference between forecast earnings and actual earnings, increase brokerage-firm volume. Adding error to their forecasts does not seem to be an ef ficient way for analysts to generate trading. I conclude that analysts are more likely to respond to trading incentives through their recommendations rather than through biasing their forecasts.
Author: Stan Beckers
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
Forecasting company earnings is a difficult and hazardous task. In an efficient market where analysts learn from past mistakes, there should be no persistent and systematic biases in consensus earnings accuracy. Previous research has already established how some (single) individual-company characteristics systematically influence forecast accuracy. So far, however, the effect on consensus earnings biases of a company's sector and country affiliation combined with a range of other fundamental characteristics has remained largely unexplored. Using data for 1993-2002, this article disentangles and quantifies for a broad universe of European stocks how the number of analysts following a stock, the dispersion of their forecasts, the volatility of earnings, the sector and country classification of the covered company, and its market capitalization influence the accuracy of the consensus earnings forecast.
Author: Ji-Chai Lin
Publisher:
ISBN:
Category :
Languages : en
Pages : 62
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Book Description
We examine aggregate analyst forecast errors (AAFE) and find a systematic component, which is predictable using lagged stock market returns and macroeconomic variables. The evidence suggests that analysts do not fully take into account macroeconomic influences on individual firms' earnings in their forecasts, and that systematic biases in market expectations exist. Since informed investors may exploit over-optimistic (over-pessimistic) analyst earnings forecasts in their sells (buys), their trading affects stock prices, which induces uninformed investors to gradually revise their expectations and leave (enter) the market. As the number of uninformed investors decreases (increases), stock market liquidity deteriorates (improves). Based on this reasoning, we show that - predictable AAFE is a driving force of time-varying stock market liquidity - and also an important channel through which stock market liquidity incorporates macroeconomic information.
