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Inefficiency in Earnings Forecasts: Experimental Evidence of Reactions to Positive vs. Negative Information

Published online by Cambridge University Press:  14 March 2025

Douglas E. Stevens  and
Arlington W. Williams
Douglas E. Stevens*
Affiliation:
Department of Accounting, School of Management, Syracuse University, 900 S. Crouse Avenue, Syracuse, NY 13244-2130, USA
Arlington W. Williams*
Affiliation:
Department of Economics, Indiana University, Wylie Hall 105, Bloomington, IN 47405, USA
*
email: desteven@syr.edu
email: williama@indiana.edu
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Abstract

Prior archival studies of analysts’ forecasts have found evidence for systematic underreaction, systematic overreaction, and systematic optimism bias. Easterwood and Nutt (1999) attempt to reconcile the conflicting evidence by testing the robustness of Abarbanell and Bernard's (1992) underreaction results to the nature of the information. Consistent with systematic optimism, forecasts are found to underreact to negative earnings information but overreact to positive information. However, Easterwood and Nutt are unable to distinguish between misreaction caused by incentives unique to analysts with misreaction caused by human decision bias that may be typical of investors. We address this issue by analyzing forecast reactions to positive versus negative information in the controlled experimental setting of Gillette, Stevens, Watts, and Williams (1999). The forecast data reveal systematic underreaction to both positive and negative information, and the underreaction is generally greater for positive information than negative information. This suggests that prior empirical evidence of forecast overreaction to positive information is unlikely to be attributable to human decision bias.

Keywords

earnings forecastslaboratory experimentshuman decision biases

JEL classification

D84: Expectations • Speculations C90: General
Type
Research Article
Information
Experimental Economics , Volume 7 , Issue 1 , February 2004 , pp. 75 - 92
Copyright
Copyright © 2004 Economic Science Association

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