Aggregate Analyst Optimism, Information Habitats, and Asset Prices
35 Pages Posted: 7 May 2019
Date Written: April 17, 2019
This paper investigates the asset pricing implications of the strategic incentives of analysts. I find that deviations between consensus analyst optimism across forecasts and recommendations for the same firm lead to temporary price movements. For example, among firms with differences between recommendation and forecast optimism, those that are predicted to appeal most (least) to retail investors (i.e. high recommendation optimism) underperform (overperform) annually by a risk-adjusted 1.26% (2.99%). Information habitats created by strategic incentives, generate excess coordinated investor demand, and provide the mechanism for which temporary price movements occur. This habitat-based explanation helps shed light on recent puzzling findings concerning analyst opinions and their impact on market return anomalies.
Keywords: Analyst, Optimism, Recommendations, Forecasts
JEL Classification: G14, G17
Suggested Citation: Suggested Citation