Wall Street Watches Washington: Asset-Pricing Implications of Policy Uncertainty

42 Pages Posted: 3 Aug 2020 Last revised: 13 May 2022

See all articles by ralph verhoeks

ralph verhoeks

Vrije Universiteit Amsterdam

Willem F. C. Verschoor

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute

Remco C. J. Zwinkels

VU University Amsterdam - Department of Finance and Financial Sector Management

Date Written: May 13, 2022

Abstract

We examine the effect of economic policy uncertainty (EPU) on analysts' forecasts, and how this uncertainty influences the information incorporated in stock prices. We find that periods of elevated EPU are associated with higher analyst disagreement, a decrease in forecast accuracy, and more conservatism. We show that the decrease in forecast accuracy can be partially attributed to limited attention to firm-specific earnings news. Finally, we demonstrate that investors do not correct for a decrease in forecast accuracy during periods of elevated EPU. Our results provide evidence that investors overweight analyst forecasts, also when forecast accuracy decreases during high EPU regimes. This has important implications for asset pricing, as the price discovery process may be distorted.

Keywords: attention, earnings announcements, economic policy uncertainty, analyst forecasts

JEL Classification: G12, G14, G18, G41

Suggested Citation

verhoeks, ralph and Verschoor, Willem F. C. and Zwinkels, Remco C.J., Wall Street Watches Washington: Asset-Pricing Implications of Policy Uncertainty (May 13, 2022). Available at SSRN: https://ssrn.com/abstract=3601323 or http://dx.doi.org/10.2139/ssrn.3601323

Ralph Verhoeks

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

Willem F. C. Verschoor

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Remco C.J. Zwinkels (Contact Author)

VU University Amsterdam - Department of Finance and Financial Sector Management ( email )

De Boelelaan 1105
Amsterdam, NL-1081HV
Netherlands
+31 20 59 85220 (Phone)

HOME PAGE: http://research.vu.nl/en/persons/remco-zwinkels

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