The Lure of the Slant and the Banality of the Conservative

AFA 2012 Chicago Meetings Paper

24th Australasian Finance and Banking Conference

56 Pages Posted: 24 Jan 2011 Last revised: 13 Jan 2017

See all articles by Craig Brown

Craig Brown

Purdue University - Department of Finance

Date Written: April 12, 2016

Abstract

Forecast bias is associated with lower short-term returns. However, bias is not equivalent to optimism when information-biased analysts exhibit processing errors. Late-tenure and early-forecasting analysts are incentivized to be strategically optimistic. Using the timing variables for identification, this paper finds that for upward revisions, a 1% increase in analyst optimism results in a 12 basis-point greater two-day return. Under normal conditions, the overpriced (underpriced) stocks covered by late-tenure (early-tenure) analysts do (do not) experience a price correction; the under-reaction engenders an analyst-optimism portfolio alpha of 62 basis points per month. The findings suggest that asset prices increase with strategic optimism.

Keywords: Analyst Optimism, Asset Prices

JEL Classification: G12, G17, G29

Suggested Citation

Brown, Craig O., The Lure of the Slant and the Banality of the Conservative (April 12, 2016). AFA 2012 Chicago Meetings Paper, 24th Australasian Finance and Banking Conference, Available at SSRN: https://ssrn.com/abstract=1746463 or http://dx.doi.org/10.2139/ssrn.1746463

Craig O. Brown (Contact Author)

Purdue University - Department of Finance ( email )

West Lafayette, IN 47907-1310
United States

HOME PAGE: http://craigobrown.me

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