Analyst underreaction and the post‐forecast revision drift

Chen, Po‐Chang; Narayanamoorthy, Ganapathi S.; Sougiannis, Theodore; Zhou, Hui

doi:10.1111/jbfa.12491

Cited by 12 publications

(1 citation statement)

References 66 publications

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“…The results indicate a pattern of excessive forecast revisions and changes in response to positive information, and conversely, insufficient forecast revisions and changes when the information is negative. Chen et al (2020) find that cognitive biases produce a serial correlation in individual analysts' revisions, confirming an underreaction to new information.…”

Section: Introductionmentioning

confidence: 71%

Intangible Assets and Analysts’ Overreaction and Underreaction to Earnings Information: Empirical Evidence from Saudi Arabia

Elkemali

2024

Risks

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Several prior studies indicate that financial analysts exhibit systematic underreaction to information; others illustrate systematic overreaction. We assume that cognitive biases influence analysts’ behavior and that these misreactions are not systematic, but they depend on the nature of news. As cognitive biases intensify in situations of high ambiguity, we distinguish between bad and good news and investigate the impact of intangible assets—synonymous with high uncertainty and risk—on financial analysts’ reactions. We explore the effect of information conveyed by prior-year earnings announcements on the current-year forecast error. Our findings in the Saudi financial market reveal a tendency for overreaction to positive prior-year earnings change (good performance) and positive prior-year forecast errors (good surprise). Conversely, there is an underreaction to the negative prior-year earnings change (bad performance) and negative prior-year forecast error (bad surprise). Notably, analysts exhibit systematic optimism rather than systematic underreaction or overreaction. The results also highlight that the simultaneous phenomena of overreaction and underreaction is more pronounced in high intangible asset firms compared to low intangible asset firms.

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Section: Introductionmentioning

confidence: 71%

Intangible Assets and Analysts’ Overreaction and Underreaction to Earnings Information: Empirical Evidence from Saudi Arabia

Elkemali

2024

Risks

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Analyst forecast revision consistency and reversal: Evidence of stock market efficiency

Chen,

Nie,

Shi

et al. 2024

J Corp Accounting Finance

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This study reexamines the information content and market price discovery associated with individual analysts' earnings forecast revisions. We refine the definition of high‐innovation revisions as high‐innovation consistent forecast revisions and high‐innovation reversal forecast revisions. Cross‐sectional analysis shows that high‐innovation reversal good (bad) news revisions, although having larger forecast changes, cause fewer upward (downward) post‐revision price shifts than high‐innovation consistent good (bad) news revisions. We also find that the market can distinguish which group of analysts provides more useful information about firms’ true value, but it takes some time for the market to digest this useful information.

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The association between current earnings surprises and the ex post bias of concurrently issued management forecasts

et al. 2022

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The vast majority of managers’ earnings forecasts are issued concurrently (i.e., bundled) with their firm’s current earnings announcement. We document a predictable bias in these forecasts—the forecasts fail to fully reflect the persistence of the current earnings surprise. Specifically, we find that managers issue (1) optimistically biased forecasts alongside negative earnings surprises and (2) pessimistically biased forecasts alongside large positive earnings surprises. Bayesian updating implies this bias could be unintentional, but we find that the bias is stronger when managers have greater incentives and fewer constraints to issue biased forecasts, suggesting that, to some extent, the bias might be intentional. Relatedly, although managers typically have better information about their firm’s earnings than analysts, we show that analyst reliance on these biased management forecasts represents a mechanism (and an alternative interpretation) for a similar analyst underreaction to current earnings attributed in the literature to analysts’ cognitive bias. We also find that, on average, investors do not appear to initially understand the bias in these forecasts but do unravel it over longer windows. However, investors more quickly unravel the bias when the manager has a history of issuing biased forecasts and when the firm has more sophisticated investors. Overall, we document that managers’ forecasts appear to repeatedly underweight the persistence of current earnings surprises, are biased in ways that improve investors’ perceptions of managers’ ability, and that this behavior concentrates in subsamples where outsiders have a harder time recognizing any bias.

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Analyst underreaction and the post‐forecast revision drift

Cited by 12 publications

References 66 publications

Intangible Assets and Analysts’ Overreaction and Underreaction to Earnings Information: Empirical Evidence from Saudi Arabia

Intangible Assets and Analysts’ Overreaction and Underreaction to Earnings Information: Empirical Evidence from Saudi Arabia

Analyst forecast revision consistency and reversal: Evidence of stock market efficiency

The association between current earnings surprises and the ex post bias of concurrently issued management forecasts

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