Contrast Effects: The Phantom of The Latest Forecasts

72 Pages Posted: 19 Sep 2022

See all articles by Huan Cai

Huan Cai

Cornell College

Xiaodi Zhang

Shanghai University of Finance and Economics

Jie Zheng

Tsinghua University - School of Economics & Management

Date Written: August 4, 2022

Abstract

Psychology research on contrast effects suggests that the information from a previous decision may be compared to the information provided for the current judgement task. We document a new stylized fact that an analyst’s current earnings forecast of one firm tends to bias against her latest forecast revision of another firm. Such evidence of contrast effects is further supported by another finding that the current forecast tends to be less accurate when the discrepancy between the current revision and the latest revision is larger. In addition, consistent with previous findings in the psychology literature, the contrast effects are stronger when the two successive forecasts are closer in forecasting time, when the two forecasted firms are more related (e.g., from the same industry), and when the analyst has more experiences. We also test stock market reaction and show that investors discount for contrast effects. Finally, additional robustness tests confirm that our results cannot be explained by alternative effects documented in the prior literature.

Keywords: Contrast Effects, Analysts, Earnings Forecasts, Cognitive Biases, Behavioral Finance.

JEL Classification: G02, G14, G24, G41

Suggested Citation

Cai, Huan and Zhang, Xiaodi and Zheng, Jie, Contrast Effects: The Phantom of The Latest Forecasts (August 4, 2022). Available at SSRN: https://ssrn.com/abstract=4211699 or http://dx.doi.org/10.2139/ssrn.4211699

Huan Cai

Cornell College ( email )

United States

Xiaodi Zhang

Shanghai University of Finance and Economics ( email )

School of Finance
Shanghai
China

Jie Zheng (Contact Author)

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China

HOME PAGE: http://jzheng.weebly.com/

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