Prior Uncertainty, Analyst Bias, and Subsequent Abnormal Returns

J. OF FINANCIAL RESEARCH

Posted: 26 Mar 1997

See all articles by Lucy F. Ackert

Lucy F. Ackert

Kennesaw State University - Michael J. Coles College of Business

George Athanassakos

University of Western Ontario - Finance-Economics Area Group

Abstract

In this paper, we examine the relation between analysts' over-optimism and uncertainty as proxied by the standard deviation of earnings forecasts. We find a positive relation between over-optimism and uncertainty, but very little or no optimism when uncertainty is low. If the uncertainty surrounding a firm is high, analysts have fewer reputational concerns when they act on their inclinations to issue optimistic forecasts. Portfolio strategies based on these findings generate abnormal returns. The results suggest that greater prior uncertainty leads to higher analyst optimism, which in turn causes market overvaluation and profitable portfolio strategies.

JEL Classification: G19

Suggested Citation

Ackert, Lucy F. and Athanassakos, George, Prior Uncertainty, Analyst Bias, and Subsequent Abnormal Returns. J. OF FINANCIAL RESEARCH, Available at SSRN: https://ssrn.com/abstract=8218

Lucy F. Ackert (Contact Author)

Kennesaw State University - Michael J. Coles College of Business ( email )

1000 Chastain Road
Department of Economics and Finance
Kennesaw, GA 30144
United States
770-423-6111 (Phone)
770-499-3209 (Fax)

George Athanassakos

University of Western Ontario - Finance-Economics Area Group ( email )

London, Ontario N6A 5B8
Canada

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