The Role of Anchoring Bias in the Equity Market: Evidence from Analysts' Earnings Forecasts and Stock Returns

Abstract:     
We test the implications of anchoring bias associated with forecast earnings per share (FEPS) for forecast errors, earnings surprises, stock returns, and stock splits. We find that analysts make optimistic (pessimistic) forecasts when a firm’s FEPS is lower (higher) than the industry median. Further, firms with FEPS greater (lower) than the industry median experience abnormally high (low) future stock returns, particularly around subsequent earnings announcement dates. Firms with a high FEPS relative to the industry median are also more likely to engage in stock splits. Finally, split firms experience more positive forecast revisions, more negative forecast errors, and more negative earnings surprises after a stock split compared with those that do not split their stocks.

Number of Pages in PDF File: 54

Keywords: anchoring, cognitive biases, analysts’ earnings forecasts, cross-sectional stock returns

JEL Classification: G14, G17

working papers series