Working Paper: NBER ID: w31094
Authors: Mark Grinblatt; Gergana Jostova; Alexander Philipov
Abstract: Cross-sectional forecasts of conservative and optimistic biases in analyst earnings estimates predict a stock's future returns, especially for firms that are hard to value. Trading strategies—whether based on the component of analyst bias that is correlated with major return anomalies or the component that is orthogonal to these anomalies—earn abnormal profits. The prevalence of optimistic analyst earnings estimates and rarity of conservative estimates emerges as a common link between anomaly-generating firm characteristics and subsequent negative alphas. For the vast majority of anomaly strategies, profitability disappears once we control for analyst bias.
Keywords: No keywords provided
JEL Codes: G12; G13; G14; G24; G41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| analyst bias (G41) | stock returns (G12) |
| optimistic analyst earnings estimates (G17) | future stock returns (G17) |
| analyst bias (G41) | mispricing (D49) |
| analyst bias (G41) | profitability of anomaly strategies (G14) |
| analyst bias correlated component (C29) | return anomalies (C22) |
| analyst bias orthogonal component (C29) | return anomalies (C22) |
| interaction of analyst bias and hard-to-value stocks (G41) | stock returns (G12) |
| analyst bias (G41) | overvaluation mistakes by investors (G41) |