Do Investors Fully Unravel Persistent Pessimism in Analysts’ Earnings Forecasts?

55 Pages Posted: 21 Jan 2015 Last revised: 13 May 2018

David Veenman

University of Amsterdam - Amsterdam Business School (ABS)

Patrick Verwijmeren

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Abstract

This study presents evidence suggesting that investors do not fully unravel predictable pessimism in sell-side analysts’ earnings forecasts. We show that measures of prior consensus and individual analyst forecast pessimism are predictive of both the sign of firms’ earnings surprises and the stock returns around earnings announcements. That is, we find that firms with a relatively high probability of forecast pessimism experience significantly higher announcement returns than those with a low probability. Importantly, we show these findings are driven by predictable pessimism in analysts’ short-term forecasts as opposed to optimism in their longer-term forecasts. We further find that this mispricing is related to the difficulty investors have in identifying differences in expected forecast pessimism. Overall, we conclude that market prices do not fully reflect the conditional probability that a firm meets or beats earnings expectations as a result of analysts’ pessimistically biased short-term forecasts.

Keywords: Analyst forecast bias, forecast pessimism, earnings announcements, mispricing, earnings surprise, benchmark beating, analyst incentives, anomaly, post-earnings announcement drift

JEL Classification: D80, G12, G14, G24, M41

Suggested Citation

Veenman, David and Verwijmeren, Patrick, Do Investors Fully Unravel Persistent Pessimism in Analysts’ Earnings Forecasts?. The Accounting Review, Vol. 93, No. 3, 2018. Available at SSRN: https://ssrn.com/abstract=2552507 or http://dx.doi.org/10.2139/ssrn.2552507

David Veenman (Contact Author)

University of Amsterdam - Amsterdam Business School (ABS) ( email )

Roetersstraat 18
Amsterdam, 1018WB
Netherlands

Patrick Verwijmeren

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Register to save articles to
your library

Register

Paper statistics

Downloads
548
rank
45,218
Abstract Views
1,879
PlumX