Anchoring, Uncertainty and the Cross Section of AnalystsÂ’ Forecast Errors
X. Frank Zhang
University of Chicago
Abstract: I examine individual analyst forecasts from 1985 to 2001, unadjusted for stock splits. I find that (a) analysts anchor on last-year earnings and underreact to new information in forecasting current-year earnings, and (b) they suffer from more anchoring bias when the direction and extent of earnings changes become more ambiguous. Consistent with the anchoring and uncertainty argument, I find that forecast errors and future forecast revisions are largely predictable ex ante. The average forecast errors and forecast revisions are negative for bad news but positive for good news, and the magnitudes of forecast errors and forecast revisions are positively related to the level of uncertainty.
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