Uncertainty and Financial Analysts’ Overconfidence: European Evidence Between High-Tech and Low-Tech Firms

23 Pages Posted: 11 May 2011

See all articles by Véronique Bessière

Véronique Bessière

University of Montpellier - MRM - IAE

Taoufik Elkemali

University of Montpellier II -MRM- IAE; King Faisal University, College of Business Administration

Date Written: February 11, 2011

Abstract

This article examines the link between uncertainty and analysts’ reaction to earnings announcements for a sample of European firms during the period 1997-2007. In the same way as Daniel et al. (1998), we posit that overconfidence leads to an overreaction to private information followed by an undereaction when the information becomes public. Psychological findings suggest that this effect is more prominent in an uncertain environment. Our tests are based on the relationship between forecast revisions and forecast errors. When analysts excessively integrate information in their revisions (i.e. overreact), their forecast revisions are too intense, and the converse occurs when they underreact. We implement a portfolio analysis and a regression analysis for two subsamples: high-tech and low-tech, as a proxy for uncertainty. Our results support the overconfidence hypothesis. We jointly observe the two phenomena of under- and overreaction. Overreaction occurs when the information has not yet been made public and disappears just after public release. Our results also show that both effects are stronger for the high-tech subsample. For robustness, we sort the sample using analyst forecast dispersion as a proxy for uncertainty and obtain similar results. We also document that the high-tech stocks crash in 2000-2001 moderated analysts’ overconfidence.

Keywords: overconfidence, overreaction, underreaction, financial analysts, earnings announcement, earnings forecasts, high-tech

JEL Classification: G17, D89

Suggested Citation

Bessière, Véronique and Elkemali, Taoufik, Uncertainty and Financial Analysts’ Overconfidence: European Evidence Between High-Tech and Low-Tech Firms (February 11, 2011). Available at SSRN: https://ssrn.com/abstract=1838063 or http://dx.doi.org/10.2139/ssrn.1838063

Véronique Bessière (Contact Author)

University of Montpellier - MRM - IAE ( email )

Place eugène Bataillon
Montpellier, 34000
France

Taoufik Elkemali

University of Montpellier II -MRM- IAE ( email )

France

King Faisal University, College of Business Administration ( email )

Al Ahsa Hofuf
Kingdom of Saudi Arabia
Hofuf, Al Ahsa 317982
Saudi Arabia

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