Top investment banks, confirmation Bias, and the market pricing of forecast revisions

Ahmadreza Vafaeimehr, Marcus Schulmerich and Sandra Paterlini

International Review of Financial Analysis, 2023, vol. 88, issue C

Abstract: We investigate the impact of top investment banks (hereafter top IBs) on the pricing of forecast revisions through the investors' attention channel by examining the distraction effect and confirmation bias theories. The distraction effect theory predicts that investors' attention shifts to consensus revisions that align with revisions from top IBs, resulting in inattention to other revisions. This theory implies that top IBs primarily benefit investors by directing them to high-quality revisions. In contrast, the confirmation bias theory predicts that top IBs magnify market reaction to forecast revisions and benefit investors by partially offsetting investors' initial underreaction to revisions. Our findings indicate the presence of confirmation bias. We further examine the potential effects of the information content of revisions, analyst agreement, news sentiment, and information uncertainty to test the robustness of our results. Our findings suggest that top IBs ultimately contribute to the price discovery process by attracting investors' attention and this effect does not channel through the quality of consensus revisions.

Keywords: Analyst earnings estimates; Investment banking business; Confirmation bias; Forecast revisions; Top investment banks (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:88:y:2023:i:c:s105752192300090x

DOI: 10.1016/j.irfa.2023.102574

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