Analysts' Forecasts as Proxies for Investor Beliefs in Empirical Research

Posted: 23 Jul 1999

See all articles by Jeffery S. Abarbanell

Jeffery S. Abarbanell

University of North Carolina (UNC) at Chapel Hill - Finance Area

William N. Lanen

University of Michigan, Stephen M. Ross School of Business

Robert E. Verrecchia

University of Pennsylvania - Accounting Department

Abstract

We study the use of properties of analysts' forecasts as surrogates for unobservable constructs in empirical research. We provide an analytical framework with which to examine past empirical practice and contemplate future empirical research. Our model is used to interpret existing empirical research and suggest new testable hypotheses. Two conceptual links are examined: the link between the properties of forecasts and theoretical constructs of investor beliefs and the link between theoretical constructs of investor beliefs and price and volume reactions to earnings announcements. Among our reported results we show that forecast dispersion on its own will not measure the level of investor uncertainty that conditions market reaction. To control adequately for investor uncertainty in empirical tests, other properties of the forecasts including the number of analysts and the amount of common information in individual forecasts must also be included. Our results also highlight the fact that the relation between market reactions and investor beliefs depends critically on assumptions about the nature of private information acquisition.

JEL Classification: G14

Suggested Citation

Abarbanell, Jeffery S. and Lanen, William N. and Verrecchia, Robert E., Analysts' Forecasts as Proxies for Investor Beliefs in Empirical Research. Available at SSRN: https://ssrn.com/abstract=5895

Jeffery S. Abarbanell (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

William N. Lanen

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109-1234
United States
734-763-0487 (Phone)
734-936-0282 (Fax)

Robert E. Verrecchia

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-6976 (Phone)
215-573-2054 (Fax)

Register to save articles to
your library

Register

Paper statistics

Abstract Views
1,732
PlumX Metrics