Do analysts overreact to extreme good news in earnings?

Do analysts overreact to extreme good news in earnings? We provide an alternative explanation for the previous finding of analysts’ overreaction to extreme good news in earnings. We show that such finding could be a result of analysts’ rational behavior in the face of high earnings uncertainty rather than their cognitive bias. Extreme earnings performance tends to be associated with higher earnings uncertainty that generally leads to more forecast optimism. Once this effect is accounted for, the univariate result of analysts’ overreaction to extreme good news in earnings is subsumed, leaving only their underreaction in general. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Do analysts overreact to extreme good news in earnings?

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Publisher
Springer US
Copyright
Copyright © 2007 by Springer Science+Business Media, LLC
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-007-0037-8
Publisher site
See Article on Publisher Site

Abstract

We provide an alternative explanation for the previous finding of analysts’ overreaction to extreme good news in earnings. We show that such finding could be a result of analysts’ rational behavior in the face of high earnings uncertainty rather than their cognitive bias. Extreme earnings performance tends to be associated with higher earnings uncertainty that generally leads to more forecast optimism. Once this effect is accounted for, the univariate result of analysts’ overreaction to extreme good news in earnings is subsumed, leaving only their underreaction in general.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Oct 18, 2007

References

  • A model of investor sentiment
    Barberis, N; Shleifer, A; Vishny, R
  • A temporal analysis of earnings surprises: profits versus losses
    Brown, LD
  • Analyst Earnings Forecasts for Publicly Traded Insurance Companies
    Fan, DK; So, RW; Yeh, JJ
  • Earnings skewness and analyst forecast bias
    Gu, Z; Wu, JS

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