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Managerial Guidance and Analysts' Underreaction


Bachmann, Kremena; Woehrmann, Peter (2007). Managerial Guidance and Analysts' Underreaction. NCCR 418, University of Zurich.

Abstract

Empirical investigations of analysts forecast surveys concerning earnings realizations find significant time varying biases usually attributed to the analysts liability to cognitive limitations. For example, a positive autocorrelation of analysts forecast errors is commonly explained by analysts underreaction. In this paper we develop a random dynamical system describing the evolution of analysts forecasts and firms prices and show that managerial guidance is capable to explain such inefficiencies in the analysts forecasting behavior. This result is well supported by empirical tests. In particular, we find that the managers of growth firms guide stronger than the managers of value firms, which allows further conclusions on the precision and efficiency of earnings forecasts released for value and growth stocks in line with the literature.

Abstract

Empirical investigations of analysts forecast surveys concerning earnings realizations find significant time varying biases usually attributed to the analysts liability to cognitive limitations. For example, a positive autocorrelation of analysts forecast errors is commonly explained by analysts underreaction. In this paper we develop a random dynamical system describing the evolution of analysts forecasts and firms prices and show that managerial guidance is capable to explain such inefficiencies in the analysts forecasting behavior. This result is well supported by empirical tests. In particular, we find that the managers of growth firms guide stronger than the managers of value firms, which allows further conclusions on the precision and efficiency of earnings forecasts released for value and growth stocks in line with the literature.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:2007
Deposited On:22 Oct 2015 14:51
Last Modified:21 Nov 2017 18:03
Series Name:NCCR
Other Identification Number:merlin-id:4563

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