First Impression Bias: Evidence from Analyst Forecasts
Review of Finance, Forthcoming
56 Pages Posted: 23 Apr 2019 Last revised: 26 May 2020
Date Written: May 2, 2020
We present evidence of first impression bias among finance professionals in the field. Equity analysts’ forecasts, target prices, and recommendations suffer from first impression bias. If a firm performs particularly well (poorly) in the year before an analyst follows it, that analyst tends to issue optimistic (pessimistic) evaluations. Consistent with negativity bias, we find that negative first impressions have a stronger effect than positive ones. The market adjusts for analyst first impression bias with a lag. Finally, our findings contribute to the literature on experience effects. We show that a set of professionals in the field, equity analysts, apply U-shaped weights to their sequence of past experiences, with greater weight on first experiences and recent experiences than on intermediate ones.
Keywords: First Impressions, Equity Analysts, Behavioral Finance
JEL Classification: D91, G14, G24, G41
Suggested Citation: Suggested Citation