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

54 Pages Posted: 26 Sep 2011

See all articles by Ling Cen

Ling Cen

The Chinese University of Hong Kong

Gilles Hilary

Georgetown University - Department of Accounting and Business Law

K. C. John Wei

Hong Kong University of Science & Technology (HKUST)

Date Written: September 26, 2011

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.

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

JEL Classification: G14, G17

Suggested Citation

Cen, Ling and Hilary, Gilles and Wei, K.C. John, The Role of Anchoring Bias in the Equity Market: Evidence from Analysts' Earnings Forecasts and Stock Returns (September 26, 2011). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming, INSEAD Working Paper No. 2011/99/AC, Available at SSRN: https://ssrn.com/abstract=1933697 or http://dx.doi.org/10.2139/ssrn.1933697

Ling Cen (Contact Author)

The Chinese University of Hong Kong ( email )

CYT Building
Sha Tin
Hong Kong, Hong Kong
Hong Kong

HOME PAGE: http:///sites.google.com/site/cenling/

Gilles Hilary

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States

K.C. John Wei

Hong Kong University of Science & Technology (HKUST)

Clearwater Bay
Kowloon, 999999
Hong Kong

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