Analysts’ Forecasts and Asset Pricing: A Survey

46 Pages Posted: 16 Mar 2016

See all articles by S.P. Kothari

S.P. Kothari

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Eric C. So

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Rodrigo S. Verdi

Massachusetts Institute of Technology (MIT)

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Date Written: March 15, 2016

Abstract

This survey reviews the literature on sell-side analysts’ forecasts and its implications for asset pricing. We review the literature on the supply and demand forces shaping analysts’ forecasting decisions as well as the implications of the information they produce for both the cash flow and the discount rate components of security returns. Analysts’ forecasts bring prices in line with the expectations they embody, consistent with the notion that analysts’ forecast contain information about future cash flows. However, analysts’ forecasts exhibit predictable biases and the market appears to underreact to the information in forecasts and not fully filter the biases in the forecasts. Analyst forecasts are also helpful in estimating expected returns on securities, but evidence on the relation between analysts’ forecasts and expected returns is still scarce. We conclude by identifying unanswered questions and offering suggestions for future research.

Suggested Citation

Kothari, S.P. and So, Eric C. and Verdi, Rodrigo S., Analysts’ Forecasts and Asset Pricing: A Survey (March 15, 2016). Available at SSRN: https://ssrn.com/abstract=2748072 or http://dx.doi.org/10.2139/ssrn.2748072

S.P. Kothari (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-325
Cambridge, MA 02142
United States
617-253-0994 (Phone)
617-253-0603 (Fax)

Eric C. So

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Rodrigo S. Verdi

Massachusetts Institute of Technology (MIT) ( email )

Sloan School of Management
100 Main Street E62-666
Cambridge, MA 02142
United States
(617) 253 2956 (Phone)

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