Stock Price Reactions to the Information and Bias in Analyst-Expected Returns

135 Pages Posted: 23 Mar 2019 Last revised: 22 Jun 2021

See all articles by Johnathan Loudis

Johnathan Loudis

University of Notre Dame - Mendoza College of Business

Date Written: June 22, 2021

Abstract

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

Loudis, Johnathan, Stock Price Reactions to the Information and Bias in Analyst-Expected Returns (June 22, 2021). Available at SSRN: https://ssrn.com/abstract=3342507 or http://dx.doi.org/10.2139/ssrn.3342507

Johnathan Loudis (Contact Author)

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States

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