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

Published online by Cambridge University Press:  03 December 2012

Ling Cen ,
Gilles Hilary  and
K. C. John Wei
Ling Cen
Affiliation:
ling.cen@rotman.utoronto.ca, Rotman School of Management, University of Toronto, 105 St George Street, Toronto, ON M5S 3E6, Canada
Gilles Hilary
Affiliation:
gilles.hilary@insead.edu, Department of Accounting, INSEAD, Boulevard de Constance, 77305 Fontainebleau, France
K. C. John Wei
Affiliation:
johnwei@ust.hk, Department of Finance, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong.
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Abstract

We test the implications of anchoring bias associated with forecast earnings per share (FEPS) for forecast errors, earnings surprises, stock returns, and stock splits. We find that analysts make optimistic (pessimistic) forecasts when a firm’s 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. These firms are also more likely to engage in stock splits. Finally, split firms experience more positive forecast revisions, more negative forecast errors, and more negative earnings surprises after stock splits.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 48 , Issue 1 , February 2013 , pp. 47 - 76
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2013 

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