First Impression Bias: Evidence from Analyst Forecasts

Review of Finance, Forthcoming

56 Pages Posted: 23 Apr 2019 Last revised: 26 May 2020

See all articles by David A. Hirshleifer

David A. Hirshleifer

Marshall School of Business, USC; National Bureau of Economic Research (NBER)

Ben Lourie

University of California, Irvine

Thomas Ruchti

Government of the United States of America - Office of Financial Research

Phong Truong

Pennsylvania State University

Date Written: May 2, 2020

Abstract

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

Hirshleifer, David A. and Lourie, Ben and Ruchti, Thomas and Truong, Phong, First Impression Bias: Evidence from Analyst Forecasts (May 2, 2020). Review of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3359354 or http://dx.doi.org/10.2139/ssrn.3359354

David A. Hirshleifer

Marshall School of Business, USC ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

HOME PAGE: http://https://sites.uci.edu/dhirshle/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ben Lourie (Contact Author)

University of California, Irvine ( email )

Irvine, CA 92697-3125
United States

Thomas Ruchti

Government of the United States of America - Office of Financial Research ( email )

717 14th Street, NW
Washington DC, DC 20005
United States

Phong Truong

Pennsylvania State University ( email )

University Park
State College, PA 16802
United States
16802 (Fax)

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