Stock Price Reactions to the Information and Bias in Analyst-Expected Returns

119 Pages Posted: 23 Mar 2019 Last revised: 19 May 2022

See all articles by Johnathan Loudis

Johnathan Loudis

University of Notre Dame - Mendoza College of Business

Date Written: May 18, 2022

Abstract

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

Loudis, Johnathan, Stock Price Reactions to the Information and Bias in Analyst-Expected Returns (May 18, 2022). Available at SSRN: https://ssrn.com/abstract=3342507 or http://dx.doi.org/10.2139/ssrn.3342507

Johnathan Loudis (Contact Author)

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
458
Abstract Views
3,119
rank
90,696
PlumX Metrics