Crowdsourced Earnings Expectations and the Market Reaction to Street Earnings Surprises

57 Pages Posted: 4 Sep 2019 Last revised: 1 Sep 2020

See all articles by Sandra Schafhäutle

Sandra Schafhäutle

University of Amsterdam Business School

David Veenman

University of Amsterdam - Amsterdam Business School (ABS)

Date Written: August 31, 2020

Abstract

Crowdsourced earnings forecasts are less pessimistically biased than Wall Street (i.e., sell-side) analysts' forecasts before earnings announcements. Based on this observation, we examine how crowdsourced forecasts influence investors' evaluation of Street earnings surprises. Using crowdsourced estimates from Estimize, we find that investors discount positive Street earnings surprises when firms simultaneously miss crowdsourced expectations, and that the incremental price premium associated with meeting or (just) beating sell-side expectations is largely eliminated when firms miss the crowdsourced consensus. Consequently, we observe significant declines in insider selling activity after earnings announcements when firms meet or beat sell-side, but miss crowdsourced expectations. Using Estimize web traffic data, we also construct a measure of attention to crowdsourced information and confirm that investors use crowdsourced estimates in processing earnings news. Overall, we conclude that crowdsourced forecasts help investors unravel sell-side forecast bias and affect managers' ability to profit from meeting or beating sell-side expectations.

Keywords: Crowdsourcing, Estimize, sell-side analysts, forecast bias, earnings announcements, market reactions, insider trading

JEL Classification: G14, G20, M41

Suggested Citation

Schafhäutle, Sandra G. and Veenman, David, Crowdsourced Earnings Expectations and the Market Reaction to Street Earnings Surprises (August 31, 2020). Available at SSRN: https://ssrn.com/abstract=3444144 or http://dx.doi.org/10.2139/ssrn.3444144

Sandra G. Schafhäutle

University of Amsterdam Business School ( email )

David Veenman (Contact Author)

University of Amsterdam - Amsterdam Business School (ABS) ( email )

Roetersstraat 18
Amsterdam, 1018WB
Netherlands

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