Journal of Financial Economics, Forthcoming
Posted: 6 Mar 2006
This paper develops a test for herding in forecasts by professional financial analysts that is robust to (a) correlated information amongst analysts; (b) common unforecasted industry-wide earnings shocks; (c) information arrival over the forecasting cycle; (d) the possibility that the earnings that analysts forecast differ from what the econometrician observes; and (e) systematic optimism or pessimism among analysts. We find that forecasts are biased, but that analysts do not herd. Instead, analysts anti-herd: Analysts systematically issue biased contrarian forecasts that overshoot the publicly-available consensus forecast in the direction of their private information.
Keywords: Earnings forecasting, Financial analysts, Herding, Econometric test, Contrarian behavior
JEL Classification: G14, C14, C53, G29
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