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Do Financial Analysts Herd?

Author

Listed:
  • Jin Yeub Kim

    (Yonsei Univ)

  • Yongjun Kim

    (Univ of Seoul)

  • Myungkyu Shim

    (Yonsei Univ)

Abstract

Financial analysts may have strategic incentives to herd or to anti-herd when issuing forecasts of firms' earnings. This paper develops and implements a new test to examine whether such incentives exist and to identify the form of strategic behavior. We use the equilibrium property of the finite-player forecasting game of Kim and Shim (2019) that forecast dispersion decreases as the number of forecasters increases if and only if there is strategic complementarity in their forecasts. Using the I/B/E/S database, we find strong evidence that supports strategic herding behavior of financial analysts. This finding is robust to different forecast horizons and sequential forecast release.

Suggested Citation

  • Jin Yeub Kim & Yongjun Kim & Myungkyu Shim, 2019. "Do Financial Analysts Herd?," Working papers 2019rwp-161, Yonsei University, Yonsei Economics Research Institute.
    • Handle: RePEc:yon:wpaper:2019rwp-161
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    References listed on IDEAS

    as
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    4. Narasimhan Jegadeesh & Woojin Kim, 2010. "Do Analysts Herd? An Analysis of Recommendations and Market Reactions," The Review of Financial Studies, Society for Financial Studies, vol. 23(2), pages 901-937, February.
    5. Trueman, Brett, 1994. "Analyst Forecasts and Herding Behavior," The Review of Financial Studies, Society for Financial Studies, vol. 7(1), pages 97-124.
    6. Cornes, Richard & Hartley, Roger, 2012. "Fully aggregative games," Economics Letters, Elsevier, vol. 116(3), pages 631-633.
    7. Martimort, David & Stole, Lars, 2012. "Representing equilibrium aggregates in aggregate games with applications to common agency," Games and Economic Behavior, Elsevier, vol. 76(2), pages 753-772.
    8. Patton, Andrew J. & Timmermann, Allan, 2010. "Why do forecasters disagree? Lessons from the term structure of cross-sectional dispersion," Journal of Monetary Economics, Elsevier, vol. 57(7), pages 803-820, October.
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    More about this item

    Keywords

    financial analysts; earnings forecasting; finite-player forecasting game; strate- gic interaction; herding;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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