Analysts’ Underreaction to Employee Business Outlooks

48 Pages Posted: 24 Jun 2019

See all articles by Nan Li

Nan Li

University of Toronto - Rotman School of Management; University of Toronto at Scarborough - Division of Management

M.H. Franco Wong

University of Toronto - Rotman School of Management

Frank Zhou

University of Pennsylvania - The Wharton School

Date Written: May 24, 2019

Abstract

We examine employees’ business outlooks (EBO) from Glassdoor.com, an online job search and employee review platform. We find that EBO and their seasonally adjusted changes are positively associated with one-quarter-ahead analysts’ earnings forecast revisions and forecast errors. This former finding is consistent with analysts incorporating EBO data into their forecast revisions, but the latter finding indicates that analysts underreact to information embedded in EBO about future earnings. Second, we document that analysts’ underreaction to EBO information is larger for companies with high information uncertainty than for those with low uncertainty. Finally, we find that EBO exhibits power predicting future stock returns for a sample of companies with high information uncertainty. More importantly, the predictive power of EBO is subsumed into analysts’ forecast errors. Taken together, these results are consistent with analysts’ failing to fully incorporate EBO into their earnings forecasts being one explanation for EBO exhibiting predictive power for future stock returns.

Keywords: employee business outlooks, social media, analyst forecasts, fundamental analysis, underreaction, market anomaly

Suggested Citation

Li, Nan and Wong, M.H. Franco and Zhou, Frank, Analysts’ Underreaction to Employee Business Outlooks (May 24, 2019). Rotman School of Management Working Paper No. 3409397. Available at SSRN: https://ssrn.com/abstract=3409397 or http://dx.doi.org/10.2139/ssrn.3409397

Nan Li (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6
Canada
416-946-3126 (Phone)

University of Toronto at Scarborough - Division of Management ( email )

1265 Military Trial
Scarborough, Ontario M1C 1A4
Canada

M.H. Franco Wong

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6
Canada
416-946-0729 (Phone)

HOME PAGE: http://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Wong.aspx

Frank Zhou

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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