Lured by the Consensus

57 Pages Posted: 23 Feb 2018 Last revised: 13 Mar 2019

See all articles by Roni Michaely

Roni Michaely

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute

Amir Rubin

Simon Fraser University (SFU) - Beedie School of Business; Interdisciplinary Center (IDC) Herzliyah

Dan Segal

Interdisciplinary Center (IDC) Herzliyah

Alexander Vedrashko

Simon Fraser University - Beedie School of Business

Date Written: February 22, 2018

Abstract

We find that investors are fixated on analysts’ consensus outputs (earnings forecasts, recommendations, and forecast dispersion), which can be inferior signals compared to the corresponding outputs provided by high-quality analysts, especially when a large number of high-quality analysts follow the firm. This result, which holds at the firm and market level, implies inefficient use of the information contained in analysts’ outputs. Further, the post-earnings announcement drift (PEAD) phenomenon occurs only when high-quality analysts are more uncertain about the firm’s performance than all analysts following the firm. We conclude that the market’s fixation on consensus measures has significant negative economic implications.

Keywords: consensus, analyst quality, forecasts, post-earnings announcement drift, stock recommendations

JEL Classification: G10, G11, G14, G17, G24, M41

Suggested Citation

Michaely, Roni and Rubin, Amir and Segal, Dan and Vedrashko, Alexander, Lured by the Consensus (February 22, 2018). Swiss Finance Institute Research Paper No. 19-06, Available at SSRN: https://ssrn.com/abstract=3128734 or http://dx.doi.org/10.2139/ssrn.3128734

Roni Michaely

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, Geneva 1211
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Amir Rubin (Contact Author)

Simon Fraser University (SFU) - Beedie School of Business ( email )

8888 University Drive
Burnaby, British Colombia V5A 1S6
Canada

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

Dan Segal

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

Alexander Vedrashko

Simon Fraser University - Beedie School of Business ( email )

Beedie School of Business
8888 University Dr.
Burnaby, British Columbia V5A1S6
Canada
778-782-3471 (Phone)

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