The Role of Anchoring Bias in the Equity Market: Evidence from Analysts’ Earnings Forecasts and Stock Returns

53 Pages Posted: 2 Mar 2007 Last revised: 22 Sep 2011

See all articles by Ling Cen

Ling Cen

The Chinese University of Hong Kong

Gilles Hilary

Georgetown University - Department of Accounting and Business Law

K.C. John Wei

Hong Kong Polytechnic University

Date Written: July 1, 2010

Abstract

“Anchoring” describes the fact that in forming numerical estimates of uncertain quantities, adjustments in assessments away from an arbitrary initial value are often insufficient. We show that this cognitive bias has significant economic consequences for the efficiency of financial markets. We find that analysts make optimistic (pessimistic) forecasts when a firm’s forecast earnings per share (FEPS) is lower (higher) than the industry median. Further, firms with FEPS greater (lower) than the industry median experience abnormally high (low) future stock returns, particularly around subsequent earnings announcement dates. Finally, split firms experience greater positive forecast revisions, larger forecast errors, and larger negative earnings surprises after a stock split compared to which did not split their stocks, especially for firms with a low FEPS relative to the industry median.

Keywords: Anchoring, Cognitive biases, Analysts’ earnings forecasts, Cross-sectional stock returns

JEL Classification: G12, G14

Suggested Citation

Cen, Ling and Hilary, Gilles and Wei, Kuo-Chiang (John), The Role of Anchoring Bias in the Equity Market: Evidence from Analysts’ Earnings Forecasts and Stock Returns (July 1, 2010). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=967309

Ling Cen

The Chinese University of Hong Kong ( email )

CYT Building
Sha Tin
Hong Kong, Hong Kong
Hong Kong

HOME PAGE: http://https://sites.google.com/site/cenling/

Gilles Hilary

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States

Kuo-Chiang (John) Wei (Contact Author)

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

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