Stock Price Reactions to the Information and Bias in Analyst-Expected Returns
135 Pages Posted: 23 Mar 2019 Last revised: 22 Jun 2021
Date Written: June 22, 2021
I use a novel decomposition to extract information and bias components from the expected returns implied by analyst price targets and provide evidence that the market does not efficiently incorporate these components into prices. Prices overreact to the bias component and reverse their initial reaction within three to six months. Prices underreact to the information component and returns drift in the direction of their initial reaction for up to 12 months. I find evidence that market participants are able to partially (but not fully) debias analyst-expected returns before updating their own expectations about future returns.
Keywords: Expected returns, Cross section, Analysts, Price targets, Market efficiency, Price drift, Return reversal
JEL Classification: G12, G14, G24, G41
Suggested Citation: Suggested Citation