Share:


Analysts’ disagreement, self-selection, and stock returns

    Liang Wu Affiliation
    ; Yunshen Long Affiliation
    ; Wenyue Li Affiliation
    ; Bingyan Wu Affiliation

Abstract

Two ex-ante variables are introduced to characterize the analysts’ biased behavior, namely the analysts’ disagreement and self-selection in analysts’ earnings forecasts. The study investigates the impact of the analysts’ disagreement and self-selection on the stock returns. A theoretical analysis derives how the stock returns are correlated with the two variables. There are two channels through which the stocks are priced according to the analysts’ disagreement. The first one is the risk channel as the analysts’ disagreement is associated with earnings uncertainty. The stock price will be discounted before the actual earnings announcement. The second one is the optimistic bias channel. The optimistic bias channel means that the stock is overpriced if the investors do not correct the analysts’ bias. The self-selection is negatively correlated with the stock return through the optimistic bias channel as more self-selection means more optimistic bias as low forecasting values are not revealed. The empirical analysis using data from the Chinese stock market supports the theoretical conclusion.

Keyword : analysts’ disagreement, self-selection, optimistic bias, stock returns, earning forecast, uncertainty

How to Cite
Wu, L., Long, Y., Li, W., & Wu, B. (2023). Analysts’ disagreement, self-selection, and stock returns. Journal of Business Economics and Management, 24(1), 37–53. https://doi.org/10.3846/jbem.2023.17832
Published in Issue
Feb 1, 2023
Abstract Views
556
PDF Downloads
625
Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.

References

Chu, J., Qin, X., & Fang, J. (2019). Margin-trading, short-selling and analysts’ forecast optimism. Management World, 1, 151–228. https://doi.org/10.19744/j.cnki.11-1235/f.2019.0011

Diether, K. B., Malloy, C. J., & Scherbina, A. (2002). Differences of opinion and the cross section of stock returns. Journal of Finance, 57(5), 2113–2141. https://doi.org/10.1111/0022-1082.00490

Doukas, J. A., Kim, C., & Pantzalis, C. (2006). Divergence of opinion and equity returns under different states of earnings expectations. Journal of Financial Markets, 9(3), 310–331. https://doi.org/10.1016/j.finmar.2006.02.002

Francis, J., & Soffer, L. (1997). The relative informativeness of analysts’ stock recommendations and earnings forecast revisions. Journal of Accounting Research, 35(2), 193–211. https://doi.org/10.2307/2491360

Gharghori, P., See, Q., & Veeraraghavan, M. (2011). Difference of opinion and the cross-section of equity returns: Australian evidence. Pacific-Basin Finance Journal, 19(4), 435–446. https://doi.org/10.1016/j.pacfin.2011.03.004

Gilson, S. C., Healy, P. M., Noe, C. F., & Palepu, K. G. (2001). Analyst specialization and conglomerate stock breakups. Journal of Accounting Research, 39(3), 565–582. https://doi.org/10.1111/1475-679X.00028

Hu, F., & Xia, Y. (2017). Analysts’ commercial motivations and earnings forecast bias: Evidence from margin transactions. Journal of Finance and Economics, 43(07), 45–56. https://doi.org/10.16538/j.cnki.jfe.2017.07.004

Irvine, P., Simko, P. J., & Nathan, S. (2004). Asset management and affiliated analysts’ forecasts. Financial Analysts Journal, 60(3), 67–78. https://doi.org/10.2469/faj.v60.n3.2622

Jackson, A. R. (2005). Trade generation, reputation, and sell-side analysts. Journal of Finance, 60(2), 673–717. https://doi.org/10.1111/j.1540-6261.2005.00743.x

Leuz, C. (2003). ADRs, analysts, and accuracy: Does cross listing in the United States improve a firm’s information environment and increase market value?. Journal of Accounting Research, 41(2), 347–362. https://doi.org/10.1111/1475-679X.00107

Li, L. (2012). Can analyst’s earning forecast be the best proxy for “earnings expectations”? Nankai Management Review, 15(6), 44–50+84. https://doi.org/10.3969/j.issn.1008-3448.2012.06.006

Lim, T. (2001). Rationality and analyst forecast bias. The Journal of Finance, 56(1), 369–385. https://doi.org/10.1111/0022-1082.00329

Lin, H. W., & Mcnichols, M. F. (1998). Underwriting relationships, analysts’ earnings forecasts and investment recommendations. Journal of Accounting and Economics, 25(1), 101–127. https://doi.org/10.1016/S0165-4101(98)00016-0

Mcnichols, M., & O’Brien, P. C. (1997). Self-selection and analyst coverage. Journal of Accounting Research, 35, 167–199. https://doi.org/10.2307/2491460

Miller, E. M. (1977). Risk, uncertainty, and divergence of opinion. Journal of Finance, 32(4), 1151–1168. https://doi.org/10.1111/j.1540-6261.1977.tb03317.x

Mola, S., & Guidolin, M. (2009). Affiliated mutual funds and analyst optimism. Journal of Financial Economics, 93(1), 108–137. https://doi.org/10.1016/j.jfineco.2008.06.006

Palmon, D., Sarath, B., & Xin, H. C. (2020). Bold stock recommendations: Informative or worthless?. Contemporary Accounting Research, 37(2), 773–801. https://doi.org/10.1111/1911-3846.12555

Scherbina, A. D. (2006). Analyst disagreement, forecast bias and stock returns. SSRN. https://doi.org/10.2139/ssrn.894381

Silva, D., & Cerqueira, A. (2021). Does investors’ divergence of opinion affect stock mispricing?. ACRN Journal of Finance and Risk Perspectives, 10(1), 1–24. https://doi.org/10.35944/jofrp.2021.10.1.001

Stickel, S. E. (1991). Common stock returns surrounding earnings forecast revisions: More puzzling evidence. Accounting Review, 66, 402–416. https://www.jstor.org/stable/247762

Tong, S. K., Grundy, B. D., Chen, N., Huang, M., Kobayashi, T., & Titman, S. (2020). Dispersion in analysts earnings forecasts and market efficiency. International Review of Finance, 20(1), 247–260. https://doi.org/10.1111/irfi.12204

Varian, H. R. (1985). Divergence of opinion in complete markets: A note. Journal of Finance, 40(1), 309–317. https://doi.org/10.1111/j.1540-6261.1985.tb04951.x

Wang, H., & Xu, X. (2017). A study on the optimism of recommendations on the part of security analysts in the equity private placements. Journal of Nanjing University of Audit, 14(03), 47–56.

You, J., Qiu, S., & Liu, C. (2013). “Changed face” phenomena of security analysts ‘forecasting behaviors: A reputation game model and evidences. Journal of Management Sciences in China, 16(6), 67–84. https://doi.org/10.3969/j.issn.1007-9807.2013.06.007

Zhang, R., Wang, R., & Wang, S. (2017). Analysts’ revisions, fundamental analysis and future stock returns. Financial Research, 445(7), 156–174. http://www.jryj.org.cn/CN/Y2017/V445/I7/156

Zhao, L., Li, Z., & Liu, J. (2013). The managers’ preferences, the optimization in the evaluation of the investment level and the obtainment of the private information. Management World, 4, 33–47. https://doi.org/10.19744/j.cnki.11-1235/f.2013.04.004

Zheng, S. (2019). Managerial ability and analyst optimism bias. Modern Finance and Economics-Journal of Tianjin University of Finance and Economics, 39(12), 97–110. https://doi.org/10.19559/j.cnki.12-1387.2019.12.007