The Lure of the Slant and the Banality of the Conservative

AFA 2012 Chicago Meetings Paper

24th Australasian Finance and Banking Conference

56 Pages Posted: 24 Jan 2011 Last revised: 13 Jan 2017

See all articles by Craig Brown

Craig Brown

Northeastern University - D’Amore-McKim School of Business

Date Written: April 12, 2016

Abstract

Forecast bias is associated with lower short-term returns. However, bias is not equivalent to optimism when information-biased analysts exhibit processing errors. Late-tenure and early-forecasting analysts are incentivized to be strategically optimistic. Using the timing variables for identification, this paper finds that for upward revisions, a 1% increase in analyst optimism results in a 12 basis-point greater two-day return. Under normal conditions, the overpriced (underpriced) stocks covered by late-tenure (early-tenure) analysts do (do not) experience a price correction; the under-reaction engenders an analyst-optimism portfolio alpha of 62 basis points per month. The findings suggest that asset prices increase with strategic optimism.

Keywords: Analyst Optimism, Asset Prices

JEL Classification: G12, G17, G29

Suggested Citation

Brown, Craig O., The Lure of the Slant and the Banality of the Conservative (April 12, 2016). AFA 2012 Chicago Meetings Paper; 24th Australasian Finance and Banking Conference. Available at SSRN: https://ssrn.com/abstract=1746463 or http://dx.doi.org/10.2139/ssrn.1746463

Craig O. Brown (Contact Author)

Northeastern University - D’Amore-McKim School of Business ( email )

360 Huntington Ave.
Boston, MA 02115
United States

HOME PAGE: http://craigobrown.me

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