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Inefficiency in Analysts' Earnings Forecasts: Systematic Misreaction or Systematic Optimism?
Author(s) -
Easterwood John C.,
Nutt Stacey R.
Publication year - 1999
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00166
Subject(s) - optimism , inefficiency , negative information , optimism bias , earnings , rationality , psychology , economics , actuarial science , cognitive psychology , social psychology , finance , microeconomics , political science , law
A rational analysis of analyst behavior predicts that analysts immediately and without bias incorporate information into their forecasts. Several studies document analysts' tendency to systematically underreact to information. Underreaction is inconsistent with rationality. Other studies indicate that analysts systematically overreact to new information or that they are systematically optimistic. This study discriminates between these three hypotheses by examining the interaction between the nature of information and the type of reaction by analysts. The evidence indicates that analysts underreact to negative information, but overreact to positive information. These results are consistent with systematic optimism in response to information.