A Re-Examination of Analyst Underreaction

Abstract

Prior studies suggest that analysts underreact to past information (Klein 1990; Abarbanell and Bernard 1992; Easterwood and Nutt 1999). I examine whether this underreaction can be attributed to analyst self-selection. Analyst self-selection arises when analysts' information production efforts focus on stocks that analysts expect to perform well. My study suggests that self-selection is responsible, at least in part, for analyst underreaction to past information about the firm's performance.