Explaining (Some) Anomalies: The Role of Analyst Bias

47 Pages Posted: 2 Sep 2015 Last revised: 16 Apr 2018

Mark Grinblatt

University of California, Los Angeles (UCLA) - Finance Area; Yale University - International Center for Finance; National Bureau of Economic Research (NBER)

Gergana Jostova

George Washington University - Department of Finance

Alexander Philipov

George Mason University - Department of Finance

Date Written: February 4, 2018

Abstract

Predictable biases in analyst earnings forecasts drive several popular anomalies. Analyst forecasts, both conservative and optimistic, distort share prices, but only for firms with hard-to-forecast earnings, like those with high credit risk, high idiosyncratic volatility, and other attributes linked to 14 popular low-return anomalies. For these firms, the risk-adjusted return spread between the least and most optimistic predicted analyst bias quintiles ranges from 6% to 19% per year, depending on the anomaly. The prevalence of analyst optimism among these firms emerges as a likely explanation for their overpricing and subsequent negative alphas.

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

JEL Classification: G14, G11, G12, G02

Suggested Citation

Grinblatt, Mark and Jostova, Gergana and Philipov, Alexander, Explaining (Some) Anomalies: The Role of Analyst Bias (February 4, 2018). 7th Miami Behavioral Finance Conference 2016. Available at SSRN: https://ssrn.com/abstract=2653666 or http://dx.doi.org/10.2139/ssrn.2653666

Mark Grinblatt

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-1098 (Phone)
310-206-5455 (Fax)

Yale University - International Center for Finance

Box 208200
New Haven, CT 06520-8200
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Gergana Jostova (Contact Author)

George Washington University - Department of Finance ( email )

2201 G St NW
Funger Hall, Suite 501
Washington, DC 20052
United States
202-994-7478 (Phone)

HOME PAGE: http://home.gwu.edu/~jostova

Alexander Philipov

George Mason University - Department of Finance ( email )

Fairfax, VA 22030
United States

HOME PAGE: http://mason.gmu.edu/~aphilipo

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