Review of Quantitative Finance and Accounting

, Volume 29, Issue 4, pp 415–431

Do analysts overreact to extreme good news in earnings?

Original Paper

Abstract

We provide an alternative explanation for the previous finding of analysts’ overreaction to extreme good news in earnings. We show that such finding could be a result of analysts’ rational behavior in the face of high earnings uncertainty rather than their cognitive bias. Extreme earnings performance tends to be associated with higher earnings uncertainty that generally leads to more forecast optimism. Once this effect is accounted for, the univariate result of analysts’ overreaction to extreme good news in earnings is subsumed, leaving only their underreaction in general.

Keywords

Financial analysts Earnings forecast Underreaction Overreaction Forecast bias 

JEL classification

G29, M41 

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Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  1. 1.Tepper School of BusinessCarnegie Mellon UniversityPittsburghUSA
  2. 2.School of Business and ManagementHong Kong University of Science and TechnologyKowloonHong Kong
  3. 3.School of Economics and ManagementTsinghua UniversityBeijingChina

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