Information Uncertainty and Analyst Forecast Behavior

Posted: 27 Jan 2006

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Abstract

Prior literature observes that information uncertainty exacerbates investor underreaction behavior. In this paper, I investigate whether, as professional investment intermediaries, sell-side analysts suffer more behavioral biases in cases of greater information uncertainty. I show that greater information uncertainty predicts more positive (negative) forecast errors and subsequent forecast revisions following good (bad) news, which corroborates previous findings on the post-analyst-revision drift. The opposite effects of information uncertainty on forecast errors and subsequent forecast revisions following good vs. bad news support the analyst underreaction hypothesis and are inconsistent with analyst forecast rationality or optimism suggested in prior literature.

Keywords: analyst forecasts error, forecast revision, information uncertainty, underreaction

JEL Classification: G14, G29, M41

Suggested Citation

Zhang, Frank, Information Uncertainty and Analyst Forecast Behavior. Contemporary Accounting Research, Vol. 23, No. 2, Summer 2006. Available at SSRN: https://ssrn.com/abstract=878374

Frank Zhang (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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