Research Summary
Research Summary
Analyst Disagreement, Forecast Bias and Stock Returns
Description
We present evidence of inefficient information processing in
equity markets by documenting that biases in analysts' earnings
forecasts are reflected in stock prices. In particular, investors
fail to account for analysts' tendency to withhold negative views
and to issue overly optimistic forecasts when earnings are
uncertain. The errors are especially severe when the two effects
interact. We show that indicators of missing negative opinions
predict earnings surprises and announcement-day returns, and can
be used to generate profitable trading strategies. Institutions
often trade against the mispricing, and in doing so push prices
closer to the fundamentals.