Analysts' Weighting of Private and Public Information
49 Pages Posted: 20 Jul 2003
Date Written: June 2003
This paper provides empirical evidence on factors affecting analysts' weighting of private and public information when they forecast firm earnings. We examine the relevance of competing explanations for the deviations of analysts' actual weighting from their efficient weighting (i.e., the optimal statistical weights on available information to form rational expectations about the underlying earnings). We find strong evidence supporting the strategic mis-weighting hypothesis (which attributes deviations from efficient weighting to analysts' rational and optimal response to economic incentives). We find weak evidence supporting the information externality hypothesis (which posits that analysts are rational but lack knowledge about the information underlying other analysts' forecasts). We find little evidence supporting the unintentional mistake hypothesis (which posits that mis-weighting is due to analysts' behavioral biases).
Keywords: analyst forecast, efficient weighting, over- and under-weighting, overconfidence, optimistic bias
JEL Classification: G14, G24, G29, J44
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