Earnings Expectations and Investor Clienteles

37 Pages Posted: 28 Jul 2003

See all articles by Robert H. Battalio

Robert H. Battalio

University of Notre Dame - Department of Finance

Richard R. Mendenhall

University of Notre Dame - Department of Finance

Date Written: July 3, 2003

Abstract

Prior research suggests that some investors may hold earnings expectations that are biased toward seasonal random walk (SRW) predictions. We provide direct evidence that the net buying activity of small (large) traders around earnings announcements is significantly positively associated with SRW (analyst) forecast errors. Further, after controlling for firm-specific variables, e.g., institutional holding, small-trader activity is positively associated with the importance of SRW forecast errors (relative to analyst forecast errors) in explaining stock returns around earnings announcements. Taken together these results suggest that a specific subset of investors (those implementing small trades) hold systematically biased expectations and affect stock prices.

Keywords: Investor clienteles, Biased expectations, Earnings expectations, market efficiency

JEL Classification: G10, G14, M41

Suggested Citation

Battalio, Robert H. and Mendenhall, Richard R., Earnings Expectations and Investor Clienteles (July 3, 2003). AFA 2004 San Diego Meetings; Mendoza College of Business Working Paper. Available at SSRN: https://ssrn.com/abstract=422900 or http://dx.doi.org/10.2139/ssrn.422900

Robert H. Battalio

University of Notre Dame - Department of Finance ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States
574-631-9428 (Phone)
574-631-5255 (Fax)

Richard R. Mendenhall (Contact Author)

University of Notre Dame - Department of Finance ( email )

330 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
574-631-6076 (Phone)
574-631-5255 (Fax)

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