Stock Price Reactions to the Information and Bias in Analyst-Expected Returns
119 Pages Posted: 23 Mar 2019 Last revised: 19 May 2022
Date Written: May 18, 2022
I use a novel decomposition to extract information and bias components from the returns implied by analyst price targets and provide evidence that the market does not efficiently incorporate these components into prices. Prices underreact to the information component and returns drift in the direction of their initial reaction for up to 12 months. Prices overreact to the bias component and reverse their initial reaction within three to six months. Market participants are able to partially debias analyst-expected returns before incorporating them into prices with the initial reaction to bias being much weaker than that to information. These effects are economically significant as evidenced by implementable trading strategies.
Keywords: Expected returns, Cross section, Analysts, Price targets, Market efficiency, Price drift, Return reversal
JEL Classification: G12, G14, G24, G41
Suggested Citation: Suggested Citation