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Measuring Herding and Exaggeration by Equity Analysts and Other Opinion Sellers

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  • Zitzewitz, Eric

    (Stanford U)

Abstract

Firms and individuals who sell opinions may bias their reports for either behavioral or strategic reasons. This paper proposes a methodology for measuring these biases, particularly whether opinion producers under or over emphasize their private information, i.e. whether they herd or exaggerate their differences with the consensus. Applying the methodology to I/B/E/S analysts reveals that they do not herd as is often assumed, but rather they exaggerate their differences with the consensus by an average factor of about 2.4. Analysts also overweight their prior-period private information and thus under-update based on last period's forecast error; this under-updating helps explain the apparently conflicting over and under-reaction results of DeBondt and Thaler (1990) and Abarbanell and Bernhard (1992). A useful by-product of the methodology is a measure of the incremental information content of an analyst's forecasts. Using this measure reveals that analysts differ greatly in performance: the information content of the future forecasts of the top 10 percent of analysts is roughly six times that of the bottom 40 percent.

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Bibliographic Info

Paper provided by Stanford University, Graduate School of Business in its series Research Papers with number 1802.

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Date of creation: Jul 2001
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Handle: RePEc:ecl:stabus:1802

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Cited by:
  1. Van Campenhout, Geert & Verhestraeten, Jan-Francies, 2010. "Herding Behavior among Financial Analysts: a literature review," Working Papers, Hogeschool-Universiteit Brussel, Faculteit Economie en Management 2010/39, Hogeschool-Universiteit Brussel, Faculteit Economie en Management.
  2. Gupta-Mukherjee, Swasti, 2013. "When active fund managers deviate from their peers: Implications for fund performance," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(4), pages 1286-1305.
  3. Cornett, Marcia Millon & Tehranian, Hassan & Yalcin, Atakan, 2007. "Regulation fair disclosure and the market's reaction to analyst investment recommendation changes," Journal of Banking & Finance, Elsevier, Elsevier, vol. 31(3), pages 567-588, March.
  4. Hirshleifer, David & Teoh, Siew Hong, 2008. "Thought and Behavior Contagion in Capital Markets," MPRA Paper 9164, University Library of Munich, Germany.
  5. Eric Zitzewitz, 2006. "Nationalism in Winter Sports Judging and Its Lessons for Organizational Decision Making," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 15(1), pages 67-99, 03.
  6. Martinez, Jose Vicente, 2011. "Information misweighting and the cross-section of stock recommendations," Journal of Financial Markets, Elsevier, Elsevier, vol. 14(4), pages 515-539, November.
  7. Bernhardt, Dan & Campello, Murillo & Kutsoati, Edward, 2006. "Who herds?," Journal of Financial Economics, Elsevier, Elsevier, vol. 80(3), pages 657-675, June.
  8. Ottaviani, Marco & Sorensen, Peter Norman, 2006. "The strategy of professional forecasting," Journal of Financial Economics, Elsevier, Elsevier, vol. 81(2), pages 441-466, August.
  9. Gloede, Oliver & Menkhoff, Lukas, 2011. "Financial professionals' overconfidence:Is it experience, function, or attitude?," Hannover Economic Papers (HEP), Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät dp-428, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  10. David Hirshleifer & Siew Hong Teoh, 2003. "Herd Behaviour and Cascading in Capital Markets: a Review and Synthesis," European Financial Management, European Financial Management Association, European Financial Management Association, vol. 9(1), pages 25-66.
  11. Friesen, Geoffrey & Weller, Paul A., 2006. "Quantifying cognitive biases in analyst earnings forecasts," Journal of Financial Markets, Elsevier, Elsevier, vol. 9(4), pages 333-365, November.
  12. Martinez, Jose Vicente, 2007. "Information Misweighting and Stock Recommendations," SIFR Research Report Series, Institute for Financial Research 59, Institute for Financial Research.
  13. Ottaviani, Marco & Sorensen, Peter Norman, 2006. "Professional advice," Journal of Economic Theory, Elsevier, Elsevier, vol. 126(1), pages 120-142, January.
  14. Marco Ottaviani & Peter Norman Sorensen, 2002. "Professional Advice: The Theory of Reputational Cheap Talk," Discussion Papers 02-05, University of Copenhagen. Department of Economics.
  15. Bizer, Kilian & Meub, Lukas & Proeger, Till & Spiwoks, Markus, 2014. "Strategic coordination in forecasting: An experimental study," Center for European, Governance and Economic Development Research Discussion Papers 195, University of Goettingen, Department of Economics.

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