IDEAS home Printed from https://ideas.repec.org/a/eee/jeborg/v66y2008i2p358-372.html
   My bibliography  Save this article

What affects the market's ability to adjust for optimistic forecast bias? Evidence from experimental asset markets

Author

Listed:
  • Ackert, Lucy F.
  • Church, Bryan K.
  • Zhang, Ping

Abstract

This study uses experimental asset markets to investigate the effects of experience and common knowledge on a market's ability to adjust for optimistic forecast bias. As a baseline, we find that period-end prices reflect unbiased forecasts in markets with private information and inexperienced traders. With low bias forecasts, traders need experience before price adjusts for the bias. With high bias forecasts, traders need experience and public forecast releases before price adjusts for the bias. Overall, our findings provide insight into identifying conditions that are critical for the full revelation of biased, imperfect forecasts and provide direction for future theoretical work.

Suggested Citation

  • Ackert, Lucy F. & Church, Bryan K. & Zhang, Ping, 2008. "What affects the market's ability to adjust for optimistic forecast bias? Evidence from experimental asset markets," Journal of Economic Behavior & Organization, Elsevier, vol. 66(2), pages 358-372, May.
    • Handle: RePEc:eee:jeborg:v:66:y:2008:i:2:p:358-372
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0167-2681(06)00272-1
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Lin, Hsiou-wei & McNichols, Maureen F., 1998. "Underwriting relationships, analysts' earnings forecasts and investment recommendations," Journal of Accounting and Economics, Elsevier, vol. 25(1), pages 101-127, February.
    2. Sunder, Shyam, 1992. "Market for Information: Experimental Evidence," Econometrica, Econometric Society, vol. 60(3), pages 667-695, May.
    3. Brian D. Kluger & Steve B. Wyatt, 2004. "Are Judgment Errors Reflected in Market Prices and Allocations? Experimental Evidence Based on the Monty Hall Problem," Journal of Finance, American Finance Association, vol. 59(3), pages 969-998, June.
    4. Chen, Shu-Heng & Yeh, Chia-Hsuan, 2002. "On the emergent properties of artificial stock markets: the efficient market hypothesis and the rational expectations hypothesis," Journal of Economic Behavior & Organization, Elsevier, vol. 49(2), pages 217-239, October.
    5. David Hirshleifer, 2001. "Investor Psychology and Asset Pricing," Journal of Finance, American Finance Association, vol. 56(4), pages 1533-1597, August.
    6. Plott, Charles R. & Gray, Peter, 1990. "The multiple unit double auction," Journal of Economic Behavior & Organization, Elsevier, vol. 13(2), pages 245-258, March.
    7. Forsythe, Robert & Lundholm, Russell, 1990. "Information Aggregation in an Experimental Market," Econometrica, Econometric Society, vol. 58(2), pages 309-347, March.
    8. Hirst, De & Koonce, L & Simko, Pj, 1995. "Investor Reactions To Financial Analysts Research Reports," Journal of Accounting Research, Wiley Blackwell, vol. 33(2), pages 335-351.
    9. Michaely, Roni & Womack, Kent L, 1999. "Conflict of Interest and the Credibility of Underwriter Analyst Recommendations," The Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 653-686.
    10. Copeland, Thomas E & Friedman, Daniel, 1992. "The Market Value of Information: Some Experimental Results," The Journal of Business, University of Chicago Press, vol. 65(2), pages 241-266, April.
    11. Beneish, Messod D, 1991. "Stock Prices and the Dissemination of Analysts' Recommendations," The Journal of Business, University of Chicago Press, vol. 64(3), pages 393-416, July.
    12. Barefield, Russell M. & Comiskey, Eugene E., 1975. "The accuracy of analysts' forecasts of earnings per share," Journal of Business Research, Elsevier, vol. 3(3), pages 241-252, July.
    13. Shyam Sunder, 2001. "Knowing What Others Know: Common Knowledge, Accounting, and Capital Markets," Yale School of Management Working Papers ysm326, Yale School of Management, revised 01 Feb 2002.
    14. Ackert, Lucy F. & Church, Bryan K. & Zhang, Ping, 2004. "Asset prices and informed traders' abilities: Evidence from experimental asset markets," Accounting, Organizations and Society, Elsevier, vol. 29(7), pages 609-626, October.
    15. Charles R. Schnitzlein, 2002. "Price Formation and Market Quality When the Number and Presence of Insiders Is Unknown," The Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1077-1109.
    16. Ackert, LF & Church, BK & Shehata, M, 1997. "An experimental examination of the effects of forecast bias on individuals' use of forecasted information," Journal of Accounting Research, Wiley Blackwell, vol. 35(1), pages 25-42.
    17. Amitabh Dugar & Siva Nathan, 1995. "The Effect of Investment Banking Relationships on Financial Analysts' Earnings Forecasts and Investment Recommendations," Contemporary Accounting Research, John Wiley & Sons, vol. 12(1), pages 131-160, September.
    18. Copeland, Thomas E & Friedman, Daniel, 1991. "Partial Revelation of Information in Experimental Asset Markets," Journal of Finance, American Finance Association, vol. 46(1), pages 265-295, March.
    19. Francis, J & Soffer, L, 1997. "The relative informativeness of analysts' stock recommendations and earnings forecast revisions," Journal of Accounting Research, Wiley Blackwell, vol. 35(2), pages 193-211.
    20. Gu, Zhaoyang & Wu, Joanna Shuang, 2003. "Earnings skewness and analyst forecast bias," Journal of Accounting and Economics, Elsevier, vol. 35(1), pages 5-29, April.
    21. Jackson, Matthew O, 1991. "Equilibrium, Price Formation, and the Value of Private Information," The Review of Financial Studies, Society for Financial Studies, vol. 4(1), pages 1-16.
    22. Ackert, Lucy F. & Church, Bryan K. & Shehata, Mohamed, 1997. "Market behavior in the presence of costly, imperfect information: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 33(1), pages 61-74, May.
    23. Cason, Timothy N. & Friedman, Daniel, 1996. "Price formation in double auction markets," Journal of Economic Dynamics and Control, Elsevier, vol. 20(8), pages 1307-1337, August.
    24. Foster, F Douglas & Viswanathan, S, 1996. "Strategic Trading When Agents Forecast the Forecasts of Others," Journal of Finance, American Finance Association, vol. 51(4), pages 1437-1478, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ackert, Lucy F. & Church, Bryan K. & Zhang, Ping, 2004. "Asset prices and informed traders' abilities: Evidence from experimental asset markets," Accounting, Organizations and Society, Elsevier, vol. 29(7), pages 609-626, October.
    2. Marina Fiedler, 2011. "Experience and Confidence in an Internet‐Based Asset Market Experiment," Southern Economic Journal, John Wiley & Sons, vol. 78(1), pages 30-52, July.
    3. Guojin Gong & Hong Qu & Ian Tarrant, 2021. "Earnings Forecasts and Price Efficiency after Earnings Realizations: Reduction in Information Asymmetry through Learning from Price," Contemporary Accounting Research, John Wiley & Sons, vol. 38(1), pages 654-675, March.
    4. Marina Fiedler, 2011. "Symposium: Experience and Confidence in an Internet-Based Asset Market Experiment," Southern Economic Journal, John Wiley & Sons, vol. 78(1), pages 30-52, July.
    5. Ackert, Lucy F. & Church, Bryan K. & Zhang, Ping, 2018. "Informed traders’ performance and the information environment: Evidence from experimental asset markets," Accounting, Organizations and Society, Elsevier, vol. 70(C), pages 1-15.
    6. Marina Fiedler, 2011. "Symposium: Experience and Confidence in an Internet-Based Asset Market Experiment," Southern Economic Journal, Southern Economic Association, vol. 78(1), pages 30-52, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ackert, Lucy F. & Church, Bryan K. & Zhang, Ping, 2004. "Asset prices and informed traders' abilities: Evidence from experimental asset markets," Accounting, Organizations and Society, Elsevier, vol. 29(7), pages 609-626, October.
    2. Lucy F. Ackert & Bryan K. Church & Ping Zhang, 1999. "The effect of forecast bias on market behavior: evidence from experimental asset markets," FRB Atlanta Working Paper 99-4, Federal Reserve Bank of Atlanta.
    3. Ackert, Lucy F. & Church, Bryan K. & Zhang, Ping, 2018. "Informed traders’ performance and the information environment: Evidence from experimental asset markets," Accounting, Organizations and Society, Elsevier, vol. 70(C), pages 1-15.
    4. Nuzzo, Simone & Morone, Andrea, 2017. "Asset markets in the lab: A literature review," Journal of Behavioral and Experimental Finance, Elsevier, vol. 13(C), pages 42-50.
    5. Martin Barner & Francesco Feri & Charles R. Plott, 2005. "On the microstructure of price determination and information aggregation with sequential and asymmetric information arrival in an experimental asset market," Annals of Finance, Springer, vol. 1(1), pages 73-107, January.
    6. Ramnath, Sundaresh & Rock, Steve & Shane, Philip, 2008. "The financial analyst forecasting literature: A taxonomy with suggestions for further research," International Journal of Forecasting, Elsevier, vol. 24(1), pages 34-75.
    7. Mei-Chen Lin & J. Jimmy Yang, 2023. "Do lottery characteristics matter for analysts’ forecast behavior?," Review of Quantitative Finance and Accounting, Springer, vol. 61(3), pages 1057-1091, October.
    8. Ackert, Lucy F. & Church, Bryan K. & Zhang, Ping, 2002. "Market behavior in the presence of divergent and imperfect private information: experimental evidence from Canada, China, and the United States," Journal of Economic Behavior & Organization, Elsevier, vol. 47(4), pages 435-450, April.
    9. Merl, Robert, 2022. "Literature review of experimental asset markets with insiders," Journal of Behavioral and Experimental Finance, Elsevier, vol. 33(C).
    10. Beyer, Anne & Cohen, Daniel A. & Lys, Thomas Z. & Walther, Beverly R., 2010. "The financial reporting environment: Review of the recent literature," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 296-343, December.
    11. Robert Merl, 2021. "Literature Review of Experimental Asset Markets with Insiders," Working Paper Series, Social and Economic Sciences 2021-04, Faculty of Social and Economic Sciences, Karl-Franzens-University Graz.
    12. Charles R. Plott, 2000. "Markets as Information Gathering Tools," Southern Economic Journal, John Wiley & Sons, vol. 67(1), pages 1-15, July.
    13. Jason Shachat & Anand Srinivasan, 2022. "Informational Price Cascades and Non-Aggregation of Asymmetric Information in Experimental Asset Markets," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 23(4), pages 388-407, November.
    14. Kothari, S.P. & Weber, Joseph & Frankel, Richard M., 2002. "Determinants of the Informativeness of Analyst Research," Working papers 4243-02, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    15. Francis, Bill & Hasan, Iftekhar & Liu, Liuling & Wu, Qiang & Zhao, Yijiang, 2021. "Financial analysts' career concerns and the cost of private debt," Journal of Corporate Finance, Elsevier, vol. 67(C).
    16. Xu, Nianhang & Jiang, Xuanyu & Chan, Kam C. & Yi, Zhihong, 2013. "Analyst coverage, optimism, and stock price crash risk: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 25(C), pages 217-239.
    17. Ackert, Lucy F. & Church, Bryan K., 1998. "Information dissemination and the distribution of wealth: Evidence from experimental asset markets," Journal of Economic Behavior & Organization, Elsevier, vol. 37(3), pages 357-371, November.
    18. Sunil Mohanty & Edward Aw, 2006. "Rationality of analysts' earnings forecasts: evidence from dow 30 companies," Applied Financial Economics, Taylor & Francis Journals, vol. 16(12), pages 915-929.
    19. Gus De Franco & Hai Lu & Florin P. Vasvari, 2007. "Wealth Transfer Effects of Analysts' Misleading Behavior," Journal of Accounting Research, Wiley Blackwell, vol. 45(1), pages 71-110, March.
    20. Horton, Joanne & Serafeim, George & Wu, Shan, 2017. "Career concerns of banking analysts," Journal of Accounting and Economics, Elsevier, vol. 63(2), pages 231-252.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jeborg:v:66:y:2008:i:2:p:358-372. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jebo .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.