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Does Past Success Lead Analysts to Become Overconfident?

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Author Info

  • Gilles Hilary

    ()
    (Department of Accounting, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong)

  • Lior Menzly

    ()
    (Vega Asset Management, 375 Park Avenue, Suite 29, New York, New York 10152-0002)

Abstract

This paper provides evidence that analysts who have predicted earnings more accurately than the median analyst in the previous four quarters tend to be simultaneously less accurate and further from the consensus forecast in their subsequent earnings prediction. This phenomenon is economically and statistically meaningful. The results are robust to different estimation techniques and different control variables. Our findings are consistent with an attribution bias that leads analysts who have experienced a short-lived success to become overconfident in their ability to forecast future earnings.

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File URL: http://dx.doi.org/10.1287/mnsc.1050.0485
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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 52 (2006)
Issue (Month): 4 (April)
Pages: 489-500

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Handle: RePEc:inm:ormnsc:v:52:y:2006:i:4:p:489-500

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Related research

Keywords: overconfidence; cognitive biases; analysts; earnings forecasts;

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Citations

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Cited by:
  1. Benson, David & Ziedonis, Rosemarie H., 2010. "Corporate venture capital and the returns to acquiring portfolio companies," Journal of Financial Economics, Elsevier, vol. 98(3), pages 478-499, December.
  2. Itzhak Ben-David & John R. Graham, 2013. "Managerial Miscalibration," The Quarterly Journal of Economics, Oxford University Press, vol. 128(4), pages 1547-1584.
  3. Derann Hsu & Cheng-Huei Chiao, 2011. "Relative accuracy of analysts’ earnings forecasts over time: a Markov chain analysis," Review of Quantitative Finance and Accounting, Springer, vol. 37(4), pages 477-507, November.
  4. Hsu, Yenshan & Shiu, Cheng-Yi, 2010. "The overconfidence of investors in the primary market," Pacific-Basin Finance Journal, Elsevier, vol. 18(2), pages 217-239, April.
  5. Zaiane Salma & Abaoub Ezzeddine, 2008. "Overconfidence And Trading Volume: Evidence From An Emergent Market," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 1(10), pages 41.
  6. Skala, Dorota, 2008. "Overconfidence in Psychology and Finance – an Interdisciplinary Literature Review," MPRA Paper 26386, University Library of Munich, Germany.
  7. Beshears, John & Milkman, Katherine L., 2011. "Do sell-side stock analysts exhibit escalation of commitment?," Journal of Economic Behavior & Organization, Elsevier, vol. 77(3), pages 304-317, March.
  8. Clarke, Jonathan & Subramanian, Ajay, 2006. "Dynamic forecasting behavior by analysts: Theory and evidence," Journal of Financial Economics, Elsevier, vol. 80(1), pages 81-113, April.
  9. García-Meca, Emma & Sánchez-Ballesta, Juan Pedro, 2006. "Influences on financial analyst forecast errors: A meta-analysis," International Business Review, Elsevier, vol. 15(1), pages 29-52, February.
  10. Chiang, Yao-Min & Hirshleifer, David & Qian, Yiming & Sherman, Ann, 2009. "Learning to Fail? Evidence from Frequent IPO Investors," MPRA Paper 16854, University Library of Munich, Germany, revised Aug 2009.
  11. Jiang, Danling, 2013. "The second moment matters! Cross-sectional dispersion of firm valuations and expected returns," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3974-3992.
  12. Virginia Bodolica & Martin Spraggon, 2011. "Behavioral Governance and Self-Conscious Emotions: Unveiling Governance Implications of Authentic and Hubristic Pride," Journal of Business Ethics, Springer, vol. 100(3), pages 535-550, May.
  13. repec:hal:cesptp:hal-00623966 is not listed on IDEAS
  14. repec:hal:wpaper:hal-00623966 is not listed on IDEAS
  15. Mellahi, Kamel & Collings, David G., 2010. "The barriers to effective global talent management: The example of corporate élites in MNEs," Journal of World Business, Elsevier, vol. 45(2), pages 143-149, April.
  16. Hilary, Gilles & Hsu, Charles, 2011. "Endogenous overconfidence in managerial forecasts," Journal of Accounting and Economics, Elsevier, vol. 51(3), pages 300-313, April.
  17. Glaser, Markus & Weber, Martin, 2009. "Which past returns affect trading volume?," Journal of Financial Markets, Elsevier, vol. 12(1), pages 1-31, February.

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