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Lured by the Consensus

Author

Listed:
  • Roni Michaely

    (University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute)

  • Amir Rubin

    (Simon Fraser University (SFU) - Beedie School of Business; Interdisciplinary Center (IDC) Herzliyah)

  • Dan Segal

    (Interdisciplinary Center (IDC) Herzliyah)

  • Alexander Vedrashko

    (Simon Fraser University - Beedie School of Business)

Abstract

We find that investors are fixated on analysts’ consensus outputs (earnings forecasts, recommendations, and forecast dispersion), which can be inferior signals compared to the corresponding outputs provided by high-quality analysts, especially when a large number of high-quality analysts follow the firm. This result, which holds at the firm and market level, implies inefficient use of the information contained in analysts’ outputs. Further, the post-earnings announcement drift (PEAD) phenomenon occurs only when high-quality analysts are more uncertain about the firm’s performance than all analysts following the firm. We conclude that the market’s fixation on consensus measures has significant negative economic implications.

Suggested Citation

  • Roni Michaely & Amir Rubin & Dan Segal & Alexander Vedrashko, 2019. "Lured by the Consensus," Swiss Finance Institute Research Paper Series 19-06, Swiss Finance Institute, revised Mar 2019.
    • Handle: RePEc:chf:rpseri:rp1906
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    More about this item

    Keywords

    consensus; analyst quality; forecasts; post-earnings announcement drift; stock recommendations;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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