Is Cognitive Bias Really Present in Analyst Forecasts? The Role of Investor Sentiment

International Business Review 23 (2014) 824–837

Posted: 10 Oct 2014

See all articles by Pilar Corredor

Pilar Corredor

Public University of Navarre

Elena Ferrer

Universidad Pública de Navarra

Rafael Santamaria

Public University of Navarre

Date Written: October 8, 2014

Abstract

This paper analyses four key markets within the European context. In this context, where the level of analyst coverage is lower than in the US setting, we aim to ascertain whether the origin of optimism in analyst forecasts in these markets is mainly strategic or whether it also contains an element of cognitive bias. Despite the fact that forecast errors lack the explanatory power to account for a significant percentage of the relationship between market sentiment and future stock returns, our new tests based on selection bias (SB1 and SB2), in conjunction with an analysis of abnormal trading volume, confirm the presence of both cognitive bias and strategic behaviour in analyst forecasts. This shows that, although regulation can reduce analyst optimism bias, the benefits are constrained by the fact that optimism bias is partly associated with cognitive bias.

Keywords: Analyst forecasts, Optimism, Investor Sentiment, Strategic Behaviour, Cognitive Bias

JEL Classification: G02, G15, G24, M41

Suggested Citation

Corredor, Pilar and Ferrer, Elena and Santamaria, Rafael, Is Cognitive Bias Really Present in Analyst Forecasts? The Role of Investor Sentiment (October 8, 2014). International Business Review 23 (2014) 824–837, Available at SSRN: https://ssrn.com/abstract=2507357

Pilar Corredor

Public University of Navarre ( email )

Elena Ferrer

Universidad Pública de Navarra ( email )

Campus Arrosadía
Pamplona, Navarra 31006
Spain

Rafael Santamaria (Contact Author)

Public University of Navarre ( email )

Campus de Arrosadia s/n
Pamplona, Navarra 31008
Spain

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