On the Association between Analysts' Forecast Errors and Past Stock Returns: A Re-Examination

32 Pages Posted: 3 May 2002

See all articles by Xia Chen

Xia Chen

Singapore Management University - School of Accountancy

Qiang Cheng

Singapore Management University - School of Accountancy

Abstract

Prior studies (e.g., Lys and Sohn 1990; Ali, Klein and Rosenfeld 1992) have documented a positive association between analysts' forecast errors and past stock returns and suggested cognitive bias on the part of analysts as a possible explanation. In this paper, we separately analyze the association between forecast errors and past negative returns and that between forecast errors and past positive returns. We find that forecast errors are only positively associated with past negative returns and are not associated with past positive returns. These results are robust to a series of sensitivity tests. They are inconsistent with analysts being subject to cognitive bias; instead, they are consistent with several explanations related to accounting conservatism or analysts' incentives: analysts having difficulty in forecasting discretionary charges associated with past negative returns, analysts not exerting effort in forecasting earnings of firms with poor performance, or analysts ignoring bad news in order to please managers.

Suggested Citation

Chen, Xia and Cheng, Qiang, On the Association between Analysts' Forecast Errors and Past Stock Returns: A Re-Examination. Sauder School of Business Working Paper, Available at SSRN: https://ssrn.com/abstract=309845 or http://dx.doi.org/10.2139/ssrn.309845

Xia Chen (Contact Author)

Singapore Management University - School of Accountancy ( email )

60 Stamford Rd.
Singapore 178900
Singapore

Qiang Cheng

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore, 178900
Singapore

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