Investor Sentiment and Analysts' Earnings Forecast Errors

Management Science (Special Issue on Behaviorial Economics and Finance), Vol. 58 (2) pp. 293-307, February 2012

32 Pages Posted: 15 Aug 2009 Last revised: 1 Jun 2012

Paul Hribar

University of Iowa - Henry B. Tippie College of Business

John M. McInnis

University of Texas at Austin - Department of Accounting

Date Written: February 15, 2012

Abstract

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.

Keywords: Analyst Forecasts, Sentiment, Stock Returns, Optimism, Expectational Errors

JEL Classification: G12, G14, G29, M41

Suggested Citation

Hribar, Paul and McInnis, John M., Investor Sentiment and Analysts' Earnings Forecast Errors (February 15, 2012). Management Science (Special Issue on Behaviorial Economics and Finance), Vol. 58 (2) pp. 293-307, February 2012. Available at SSRN: https://ssrn.com/abstract=1452893

Paul Hribar

University of Iowa - Henry B. Tippie College of Business ( email )

Dept. of Accounting
Iowa City, IA 52242-1000
United States
319-335-1008 (Phone)

John M. McInnis (Contact Author)

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States
512-232-6791 (Phone)

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