Hard to arbitrage, hard for analysts to forecast

Yanran Wu and Chao Zhang

The North American Journal of Economics and Finance, 2022, vol. 62, issue C

Abstract: This paper examines whether limits to arbitrage (LA) affect analysts' earnings forecast accuracy. Using the LA index, which is constructed from unique trading constraints in the Chinese stock market and other commonly used measures, we find that forecast accuracy is much lower for stocks with high LA. Moreover, our results are more suited to explanations of cognitive bias that turn to investor sentiment or limited attention and cannot be fully explained by more objective factors, including analyst ability, broker size, broker experience, and commission pressure. We also find that LA amplifies analyst forecast dispersion. Such results indicate that LA distorts analysts’ earnings expectations and provides new insight into how LA affects anomaly returns.

Keywords: Limited arbitrage; Market sentiment; Analysts; Forecast accuracy; Limited attention; Forecast dispersion (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:62:y:2022:i:c:s1062940822001309

DOI: 10.1016/j.najef.2022.101792

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