Signal Strength, Conflicting Signals and Beliefs Updating: Evidence From Sell-Side Analysts' Forecasts

48 Pages Posted: 30 Jun 2021 Last revised: 9 Jul 2021

See all articles by José Astaiza-Gómez

José Astaiza-Gómez

Universidad del Rosario - Faculty of Economics

Date Written: June 19, 2021

Abstract

I empirically study how confirmatory bias works for strong and contradictory signals using data on sell-side analysts. I first model an agent who is prone to confirmatory bias and whose task is to value a stock based on a signal, and introduce the effects of the signal strength by relaxing Rabin and Schrag's (1999) assumption of a constant bias severity. Afterwards I use target prices to measure forecast bias and the growth in Earnings Per Share as signals, and regress analysts' forecast bias over different deciles of favorable signals interacted with prior negative forecast bias in a dynamic panel data model. I find that analysts do not react positively to favorable signals when the prior is pessimistic, except for sufficiently strong signals which cause analysts to issue more optimistic target prices.

Keywords: Bayesian updating, misinterpretation, pessimistic prior, optimistic forecast

JEL Classification: G17, G11, G41

Suggested Citation

Astaiza-Gómez, José Gabriel, Signal Strength, Conflicting Signals and Beliefs Updating: Evidence From Sell-Side Analysts' Forecasts (June 19, 2021). Available at SSRN: https://ssrn.com/abstract=3870520 or http://dx.doi.org/10.2139/ssrn.3870520

José Gabriel Astaiza-Gómez (Contact Author)

Universidad del Rosario - Faculty of Economics ( email )

Casa Pedro Fermín
Calle 14 # 4-69
Bogota
Colombia

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