Investor Learning About Analyst Predictive Ability
38 Pages Posted: 7 Mar 2003
Date Written: January 2003
Bayesian learning implies decreasing weights on prior beliefs and increasing weights on track records, as the latter become more precise. We test whether investors learn about analyst predictive ability in this manner by examining market reactions to analysts' forecasts. Consistent with investors shifting weight to track records, we find that market reactions to analysts' forecasts of quarterly earnings are increasing in the product of the accuracy and length of analysts' track records. Moreover, we show that the dynamic learning predicted by our model is more descriptive of market reactions to analysts' forecasts than a static model which predicts that investors' responses to forecast revisions condition only on the prior accuracy of the analyst.
Keywords: Analyst, Bayesian Learning
JEL Classification: G14, G24
Suggested Citation: Suggested Citation