Analyst Bias and Mispricing

Abstract

Cross-sectional forecasts of conservative and optimistic biases in analyst earnings estimates predict a stock's future returns, especially for firms that are hard to value. Trading strategies—whether based on the component of analyst bias that is correlated with major return anomalies or the component that is orthogonal to these anomalies—earn abnormal profits. The prevalence of optimistic analyst earnings estimates and rarity of conservative estimates emerges as a common link between anomaly-generating firm characteristics and subsequent negative alphas. For the vast majority of anomaly strategies, profitability disappears once we control for analyst bias.

Keywords: Analyst bias, credit risk, anomalies, market efficiency, behavioral

JEL Classification: G14, G11, G12, G02