Explaining (Some) Anomalies: The Role of Analyst Bias
47 Pages Posted: 2 Sep 2015 Last revised: 16 Apr 2018
Date Written: February 4, 2018
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: Suggested Citation