Do investors fully unravel persistent pessimism in analysts' earnings forecasts?

Veenman, D. and Verwijmeren, P. (2018) Do investors fully unravel persistent pessimism in analysts' earnings forecasts? Accounting Review, 93(3), pp. 349-377. (doi: 10.2308/accr-51864)

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This study presents evidence suggesting that investors do not fully unravel predictable pessimism in sell-side analysts' earnings forecasts. We show that measures of prior consensus and individual analyst forecast pessimism are predictive of both the sign of firms' earnings surprises and the stock returns around earnings announcements. That is, we find that firms with a relatively high probability of forecast pessimism experience significantly higher announcement returns than those with a low probability. Importantly, we show these findings are driven by predictable pessimism in analysts' short-term forecasts as opposed to optimism in their longer-term forecasts. We further find that this mispricing is related to the difficulty investors have in identifying differences in expected forecast pessimism. Overall, we conclude that market prices do not fully reflect the conditional probability that a firm meets or beats earnings expectations as a result of analysts' pessimistically biased short-term forecasts.

Item Type:Articles
Glasgow Author(s) Enlighten ID:Verwijmeren, Professor Patrick
Authors: Veenman, D., and Verwijmeren, P.
College/School:College of Social Sciences > Adam Smith Business School > Accounting and Finance
Journal Name:Accounting Review
Publisher:American Accounting Association
ISSN (Online):1558-7967
Published Online:24 April 2018

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