Analysts' Herding Propensity: Theory and Evidence from Earnings Forecasts

39 Pages Posted: 12 Sep 2006

See all articles by Murugappa (Murgie) Krishnan

Murugappa (Murgie) Krishnan

Yeshiva University

Steve C. Lim

Texas Christian University - M.J. Neeley School of Business

Ping Zhou

City University of New York - CUNY Baruch College

Date Written: September 2006

Abstract

We model and estimate analysts' herding propensity with I/B/E/S annual earnings forecast data. Compared to prior studies, our paper has three unique features. First, we estimate analysts' true posterior beliefs of a firm's earnings assuming rational expectations rather than using analysts' own prior forecasts. Second, we estimate analysts' herding propensity at aggregate and the analyst levels rather than the forecast level. Third, we perform out-of-sample rather than in-sample tests on the usefulness of our herding propensity estimates. We document pervasive herding behavior. At the aggregate level, we find that herding propensity is positively related to forecast horizon and analyst coverage, but negatively related to analysts' general experience and brokerage size. At the analyst level, we find that about 75% (15%) of the analysts in our sample tend to herd (anti-herd). Moreover, our in-sample herding propensity estimates are useful in explaining the cross-sectional variation in analysts' out-of-sample herding behavior and forecast accuracy.

JEL Classification: G20, M41, G10, D84

Suggested Citation

Krishnan, Murugappa (Murgie) and Lim, Steve and Zhou, Ping, Analysts' Herding Propensity: Theory and Evidence from Earnings Forecasts (September 2006). AAA 2007 Financial Accounting & Reporting Section (FARS) Meeting Paper, Available at SSRN: https://ssrn.com/abstract=929467 or http://dx.doi.org/10.2139/ssrn.929467

Murugappa (Murgie) Krishnan (Contact Author)

Yeshiva University ( email )

500 West 185th Street
New York, NY 10033
United States

Steve Lim

Texas Christian University - M.J. Neeley School of Business ( email )

2900 Lubbock Street
Fort Worth, TX 76129
United States
817-257-7536 (Phone)

Ping Zhou

City University of New York - CUNY Baruch College ( email )

17 Lexington Avenue
New York, NY 10021
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
546
Abstract Views
3,189
rank
62,347
PlumX Metrics