Lured by the Consensus

Roni Michaely, Amir Rubin, Dan Segal and Alexander Vedrashko
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Amir Rubin: Simon Fraser University (SFU) - Beedie School of Business; Interdisciplinary Center (IDC) Herzliyah
Dan Segal: Interdisciplinary Center (IDC) Herzliyah
Alexander Vedrashko: Simon Fraser University - Beedie School of Business

No 19-06, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We find that investors are fixated on analysts’ consensus outputs (earnings forecasts, recommendations, and forecast dispersion), which can be inferior signals compared to the corresponding outputs provided by high-quality analysts, especially when a large number of high-quality analysts follow the firm. This result, which holds at the firm and market level, implies inefficient use of the information contained in analysts’ outputs. Further, the post-earnings announcement drift (PEAD) phenomenon occurs only when high-quality analysts are more uncertain about the firm’s performance than all analysts following the firm. We conclude that the market’s fixation on consensus measures has significant negative economic implications.

Keywords: consensus; analyst quality; forecasts; post-earnings announcement drift; stock recommendations (search for similar items in EconPapers)
JEL-codes: G10 G11 G14 G17 G24 M41 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2019-03, Revised 2019-03
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1906

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