Articlegreen1997

PRIOR UNCERTAINTY, ANALYST BIAS, AND SUBSEQUENT ABNORMAL RETURNS

135 citations0/0 files storedThe Journal of Financial Research

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Auditing, Earnings Management, Governance Financial Markets and Investment Strategies Forecasting Techniques and Applications

Abstract

Abstract In this paper we examine the relation between analysts' overoptimism and uncertainty as proxied by the standard deviation of earnings forecasts. We find a positive relation between overoptimism 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.

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References

1988Herd Behavior and Investment 1964The General Theory of Employment, Interest, and Money [1936]1993Analysts' Decisions As Products of a Multi-Task Environment 1990Do Security Analysts Overreact 1995The Effect of Investment Banking Relationships on Financial Analysts' Earnings Forecasts and Investment Recommendations*1995The Conditional Relation between Beta and Returns 1991Evidence on the Possible Underweighting of Earnings-Related Information 1992The January Anomaly: Effects of Low Share Price, Transaction Costs, and Bid-Ask Bias

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