Overreaction and Underreaction in Analysts' Forecasts: A Pre- Versus Post-Crash Investigation

Banque et Marchés, Forthcoming

Montpellier University CREGO Working Paper No. 21

21 Pages Posted: 3 Apr 2006

See all articles by Véronique Bessière

Véronique Bessière

University of Montpellier - MRM - IAE

Michael Kaestner

Toulouse University

Date Written: January 2006

Abstract

The financial markets crash, which occurred March-April 2000 has aroused suspicion about financial analysts' forecasts accuracy which could have made them more cautious, perhaps pessimistic about future performance. This article investigates the possibility of recent behavioral changes by examining analysts' reactions to good and bad news before and after the crash. We analyze the interaction between over- and under-reaction and the optimistic bias following Easterwood and Nutt (1999)'s methodology. If the crash leads analysts to be less prone to optimism (or even pessimism), we might observe weaker underreaction (or possibly overreaction) to bad news and weaker overreaction (or possibly underreaction) to good news.

Our results indicate a strong decrease in optimism after the crash. The tendency to produce overly positive and moderately negative revisions or forecasted changes diminishes or reverses. Reactions to new information are consistent with a reduction in optimism: analysts' systematic underreaction to negative information strongly decreases after the crash. Overreaction to positive information, less pronounced before the crash, is also weakened.

Note: Downloadable document is in French.

Keywords: Analysts' estimates, accuracy, crash

JEL Classification: G14, D83

Suggested Citation

Bessière, Véronique and Kaestner, Michael, Overreaction and Underreaction in Analysts' Forecasts: A Pre- Versus Post-Crash Investigation (January 2006). Banque et Marchés, Forthcoming, Montpellier University CREGO Working Paper No. 21, Available at SSRN: https://ssrn.com/abstract=894575

Véronique Bessière

University of Montpellier - MRM - IAE ( email )

Place eugène Bataillon
Montpellier, 34000
France

Michael Kaestner (Contact Author)

Toulouse University ( email )

118 Route de Narbonne
Toulouse cedex 9, F-31062
France

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