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
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
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