Prospect Theory, Analyst Forecasts, and Stock Returns

29 Pages Posted: 20 Jul 2004

See all articles by Charlie Charoenwong

Charlie Charoenwong

Nanyang Technological University (NTU)

David K. Ding

Singapore Management University - Lee Kong Chian School of Business; Massey University - School of Economics and Finance

Raymond Seetoh

Nanyang Business School, Nanyang Technological University

Abstract

This paper documents how prospect theory can be used to explain stock returns and analysts' forecast behavior. Positive earnings surprises are associated with increases in abnormal returns but negative earnings surprises have only a limited negative impact on returns. We find that analysts display asymmetric behavior towards positive and negative earnings growth. Analysts' forecasts are found to be accurate during periods of positive earnings growth, but overly optimistic during periods of negative earnings growth. Our findings have implications for the structuring of investment products, as well as the role of market timing in their introduction.

Keywords: Behavioral finance, prospect theory, analyst forecasts, earnings growth, earnings surprise

JEL Classification: G14, G29, G34, M41, O53

Suggested Citation

Charoenwong, Charlie and Ding, David K. and Seetoh, Raymond, Prospect Theory, Analyst Forecasts, and Stock Returns. Available at SSRN: https://ssrn.com/abstract=566961

Charlie Charoenwong

Nanyang Technological University (NTU) ( email )

Nanyang Business School, BF Division
S3-01c-104
Singapore, 639798
Singapore
+65 6790 4799 (Phone)
+65 6791 3697 (Fax)

David K. Ding (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore, 178899
Singapore
+65 6828-0245 (Phone)

Massey University - School of Economics and Finance ( email )

Auckland
New Zealand

Raymond Seetoh

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore

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