Are Expectations Misled by Chance? Quasi-Experimental Evidence from Financial Analysts

Pascal Flurin Meier (), Raphael Flepp () and Egon Franck
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Pascal Flurin Meier: Department of Business Administration, University of Zurich
Raphael Flepp: Department of Business Administration, University of Zurich

No 396, Working Papers from University of Zurich, Department of Business Administration (IBW)

Abstract: We examine whether finance professionals deviate from Bayes’ theorem on the processing of nondiagnostic information when forecasting quarterly earnings. Using field data from sell-side financial analysts and employing a regression discontinuity design, we find that analysts whose forecasts have barely been met become increasingly optimistic relative to when their forecasts have barely been missed. This result is consistent with an update of analysts’ expectations after observing uninformative performance signals. Our results also suggest that this behavior leads to significantly worse forecasting accuracy in the subsequent quarter. We contribute to the literature by providing important field evidence of expectation formation under uninformative signals.

Keywords: Financial Analysts; Information Processing; Uninformative Signals; Outcome Bias; Regression Discontinuity Design (search for similar items in EconPapers)
JEL-codes: D81 D83 D91 G41 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2022-12
New Economics Papers: this item is included in nep-ban and nep-exp
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Persistent link: https://EconPapers.repec.org/RePEc:zrh:wpaper:396

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