Investor Sentiment and Analysts' Earnings Forecast Errors
University of Iowa - Henry B. Tippie College of Business
John M. McInnis
University of Texas at Austin - Department of Accounting
February 15, 2012
Management Science (Special Issue on Behaviorial Economics and Finance), Vol. 58 (2) pp. 293-307, February 2012
We correlate analysts’ forecast errors with temporal variation in investor sentiment. We find that when sentiment is high, analysts’ forecasts of one-year-ahead earnings and long-term earnings growth are relatively more optimistic for “uncertain” or “difficult to value” firms. Adding these forecast errors to a regression of stock returns on sentiment absorbs a sizable fraction of the explanatory power of sentiment for the cross-section of future returns. This finding provides direct support the notion that investor sentiment affects the earnings expectations of hard to value firms. Additional tests suggest that this bias in expectations is unlikely to be strategic in nature. Our results provide new insight into the mechanism through which investor sentiment affects returns.
Number of Pages in PDF File: 32
Keywords: Analyst Forecasts, Sentiment, Stock Returns, Optimism, Expectational Errors
JEL Classification: G12, G14, G29, M41
Date posted: August 15, 2009 ; Last revised: June 1, 2012
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