This study presents evidence suggesting that investors do not fully unravel predictable pessimism in sell-side analysts’ earnings forecasts. We show that measures of prior consensus and individual analyst forecast pessimism are predictive of both the sign of firms’ earnings surprises and the stock returns around earnings announcements. That is, we find that firms with a relatively high probability of forecast pessimism experience significantly higher announcement returns than those with a low probability. Importantly, we show that these findings are driven by predictable pessimism in analysts’ short-term forecasts, as opposed to optimism in their longer-term forecasts. We further find that this mispricing is related to the difficulty investors have in identifying differences in expected forecast pessimism. Overall, we conclude that market prices do not fully reflect the conditional probability that a firm meets or beats earnings expectations as a result of analysts’ pessimistically biased short-term forecasts.

Additional Metadata
Keywords Analyst forecast bias, Analyst incentives, Benchmark beating, Earnings announcements, Earnings surprise, Forecast pessimism, Mispricing
JEL Asset Pricing (jel G12), Information and Market Efficiency; Event Studies (jel G14), Financial Institutions and Services: General (jel G20), Information, Knowledge, and Uncertainty: General (jel D80), Accounting (jel M41)
Persistent URL dx.doi.org/10.2308/accr-51864, hdl.handle.net/1765/112818
Series ERIM Top-Core Articles
Journal The Accounting Review
Citation
Veenman, D, & Verwijmeren, P. (2018). Do investors fully unravel persistent pessimism in analysts’ earnings forecasts?. The Accounting Review (Vol. 93, pp. 349–377). doi:10.2308/accr-51864