Sophisticated and Unsophisticated Investors' Reactions to Analysts' Forecast Revisions Conditional on Factors that are Associated with Forecast Accuracy

48 Pages Posted: 14 Nov 2001

Date Written: August 2001

Abstract

In this study we examine differences between sophisticated and unsophisticated investors' incorporation of information about the accuracy of sell-side analysts' revisions of quarterly earnings forecasts. Our results indicate that sophisticated investors' weights on information cues associated with accuracy more closely match the weights derived from environmental models of forecast accuracy. Further, our findings suggest that sophisticated investors' strategies better reflect the costs and benefits of using accuracy cues that provide statistically significant, but economically small, explanatory power for forecast accuracy. Our evidence is consistent with sophisticated investors having greater knowledge about the factors that are related to forecast accuracy and exhibiting more adaptive cue-weighting strategies.

Keywords: Analyst forecast revisions; Market reaction; Investor sophistication; Cue weighting; Adaptive decision-making

JEL Classification: D83, G12, G14, G29, M41

Suggested Citation

Bonner, Sarah E. and Walther, Beverly R. and Young, Susan M., Sophisticated and Unsophisticated Investors' Reactions to Analysts' Forecast Revisions Conditional on Factors that are Associated with Forecast Accuracy (August 2001). Available at SSRN: https://ssrn.com/abstract=280710 or http://dx.doi.org/10.2139/ssrn.280710

Sarah E. Bonner (Contact Author)

University of Southern California ( email )

Marshall School of Business
Los Angeles, CA 90089-0441
United States
213-740-5025 (Phone)
213-747-2815 (Fax)

Beverly R. Walther

Northwestern University - Department of Accounting Information & Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-467-1595 (Phone)
847-467-1202 (Fax)

Susan M. Young

Fordham University ( email )

1790 Broadway
Suite 11-13
New York, NY 10019
United States
646.312.8245 (Phone)
646.312.8295 (Fax)

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