Tests of analysts' overreaction/underreaction to earnings information as an explanation for anomalous stock price behavior

Article Abstract:

This study examines whether security analysts underreact or overreact to prior earnings information, and whether any such behavior could explain previously documented anomalous stock price movements. We present evidence that analysts' forecasts underreact to recent earnings. This feature of the forecasts is consistent with certain properties of the naive seasonal random walk forecast that Bernard and Thomas (1990) hypothesize underlie the well-known anomalous post-earnings-announcement drift. However, the underreactions in analysts' forecasts are at most only about half as large necessary to explain the magnitude of the drift. We also document that the "extreme" analysts' forecasts studied by DeBondt and Thaler (1990) cannot be viewed as overreactions to earnings, and are not clearly linked to the stock price overreactions discussed in DeBondt and Thaler (1985, 1987) and Chopra, Lakonishok, and Ritter (Forthcoming). We conclude that security analysts' behavior is at best only a partial explanation for stock price underreaction to earnings, and may be unrelated to stock price overreactions.(Reprinted by permission of the publisher.)

Security and commodity exchanges, Analysis, Economic aspects, Prices and rates, Stocks, Stock-exchange, Stock exchanges, Stock prices, Investment analysis, Securities analysis

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Underreaction, overreaction, and increasing misreaction to information in the options market

Article Abstract:

Stock options market reaction to instantaneous variance of underlying assets has been investigated and produced several findings. These include that investors often underreact to daily changes in variance, that investors overreact to prolonged decreasing or increasing changes, and that they disregard or over-emphasize variance changes preceded by opposite changes.

Stocks & Other Equity Securities, Statistical Data Included, Management, Stock options

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Inefficiency in Analysts' Earnings Forecasts: Systematic Misreaction or Systematic Optimism?

Article Abstract:

The author examines the problem of forecast inefficiency in securities markets. Topics include reactions to earnings information, forecasting models, and factoring error rates.

Methods, Evaluation, Financial services industry, Financial services, Services, Investment advisers, Financial analysis, Efficient market theory

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