Predictability of Analyst Earnings Forecast Errors and Institutional and Individual Investors’ Reactions to Earnings News

Journal of Accounting, Auditing & Finance, 36(4), 826–853, 2021. https://doi.org/10.1177/0148558X20939332

ESMT Berlin Working Paper

42 Pages Posted: 14 Sep 2023

See all articles by Neil Bhattacharya

Neil Bhattacharya

Southern Methodist University (SMU) - Accounting Department

Per Olsson

ESMT European School of Management and Technology

Hyungshin Park

Kennesaw State University - Michael J. Coles College of Business

Date Written: October 1, 2021

Abstract

We decompose analysts’ earnings forecast error into predictable and unpredictable components, and investigate individual vis-à-vis institutional investors’ reactions to each of these components. We find that in the immediate post-earnings announcement window, only individuals under-react to the predictable component, while both individuals and institutions under-react to the unpredictable component. The price drift in this window is driven primarily by investors’ under-reaction to the unpredictable component. This drift remains highly significant in larger firms and intensifies in firms with complex financial reports, suggesting that it likely represents the slow and noisy process of price discovery. Around the next quarterly earnings announcement, only individuals under-react to the previous quarter’s predictable component, and this fixation drives the entire price drift in this window. This drift disappears in larger firms, and gets exacerbated in firms with greater forecast error autocorrelations, suggesting that it is likely attributable to incomplete processing of earnings information by individuals.

Keywords: Analyst Forecast, Earnings Announcement, Investor Sophistication, Under-Reaction

Suggested Citation

Bhattacharya, Neil and Olsson, Per and Park, Hyungshin, Predictability of Analyst Earnings Forecast Errors and Institutional and Individual Investors’ Reactions to Earnings News (October 1, 2021). Journal of Accounting, Auditing & Finance, 36(4), 826–853, 2021. https://doi.org/10.1177/0148558X20939332, ESMT Berlin Working Paper, Available at SSRN: https://ssrn.com/abstract=3862849

Neil Bhattacharya

Southern Methodist University (SMU) - Accounting Department ( email )

Per Olsson

ESMT European School of Management and Technology ( email )

Schlossplatz 1
10117 Berlin
Germany

Hyungshin Park (Contact Author)

Kennesaw State University - Michael J. Coles College of Business ( email )

1000 Chastain Road
Kennesaw, GA 30144
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
28
Abstract Views
162
PlumX Metrics