Article2003

Do Investors Overrely on Old Elements of the Earnings Time Series?*

Robert J. Bloomfield · Robert Libby · Mark W. Nelson

71 citations0/0 files storedContemporary Accounting Research

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Financial Markets and Investment Strategies Auditing, Earnings Management, Governance Decision-Making and Behavioral Economics

Abstract

Abstract This paper reports an experiment demonstrating that MBA students overrely on old earnings performance when predicting future earnings performance in a laboratory setting. In the experiment, MBA students relied too heavily on old annual ROE information to predict future annual ROE. The experiment shows how a common cognitive error (overreliance on unreliable information) interacts with the structure of the earnings time series to create particular patterns of prediction errors. The results also suggest directions for research on two well‐known anomalies, long‐run overreactions (De Bondt and Thaler 1985, 1987) and post‐earnings‐announcement drift (Bernard and Thomas 1990).

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References

1974Judgment under Uncertainty: Heuristics and Biases 1985Does the Stock Market Overreact?1998Investor Psychology and Security Market Under‐ and Overreactions 1994Contrarian Investment, Extrapolation, and Risk n.d.A model of investor sentiment /1998A model of investor sentiment1We are grateful to the NSF for financial support, and to Oliver Blanchard, Alon Brav, John Campbell (a referee), John Cochrane, Edward Glaeser, J.B. Heaton, Danny Kahneman, David Laibson, Owen Lamont, Drazen Prelec, Jay Ritter (a referee), Ken Singleton, Dick Thaler, an anonymous referee, and the editor, Bill Schwert, for comments.1 1987Further Evidence On Investor Overreaction and Stock Market Seasonality 1990Evidence that stock prices do not fully reflect the implications of current earnings for future earnings

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