Suppressed Negative Information and Future Underperformance
41 Pages Posted: 17 Apr 2007
Date Written: January 23, 2007
We present evidence of inefficient information processing in equity markets by documenting that negative information withheld by securities analysts is reflected in stock prices with a significant delay. We estimate the extent of the withheld negative information based on the proportion of analysts who stop revising their annual earnings forecasts. This measure predicts negative earnings surprises and negative price reaction around earnings announcements. It could also be used to generate profitable trading strategies. We show that institutions tend to sell their stock holdings as our measure of unreported negative news increases, thus ameliorating the mispricing.
Keywords: analyst incentives, dropped coverage, mispricing, earnings surprises
JEL Classification: G00, G12, G14
Suggested Citation: Suggested Citation