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Intangible Assets and Analysts’ Overreaction and Underreaction to Earnings Information: Empirical Evidence from Saudi Arabia

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  • Taoufik Elkemali

    (Accounting Department, College of Business Administration, King Faisal University, Al-Ahsa 31982, Saudi Arabia
    Finance and Accounting Department, Faculty of Economics and Management of Mahdia, University of Monastir, Monastir 5000, Tunisia
    University of Manouba, ISCAE, LIGUE LR99ES24, Manouba 2010, Tunisia)

Abstract

Several prior studies indicate that financial analysts exhibit systematic underreaction to information; others illustrate systematic overreaction. We assume that cognitive biases influence analysts’ behavior and that these misreactions are not systematic, but they depend on the nature of news. As cognitive biases intensify in situations of high ambiguity, we distinguish between bad and good news and investigate the impact of intangible assets—synonymous with high uncertainty and risk—on financial analysts’ reactions. We explore the effect of information conveyed by prior-year earnings announcements on the current-year forecast error. Our findings in the Saudi financial market reveal a tendency for overreaction to positive prior-year earnings change (good performance) and positive prior-year forecast errors (good surprise). Conversely, there is an underreaction to the negative prior-year earnings change (bad performance) and negative prior-year forecast error (bad surprise). Notably, analysts exhibit systematic optimism rather than systematic underreaction or overreaction. The results also highlight that the simultaneous phenomena of overreaction and underreaction is more pronounced in high intangible asset firms compared to low intangible asset firms.

Suggested Citation

  • Taoufik Elkemali, 2024. "Intangible Assets and Analysts’ Overreaction and Underreaction to Earnings Information: Empirical Evidence from Saudi Arabia," Risks, MDPI, vol. 12(4), pages 1-16, April.
    • Handle: RePEc:gam:jrisks:v:12:y:2024:i:4:p:63-:d:1368932
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    References listed on IDEAS

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    8. Po‐Chang Chen & Ganapathi S. Narayanamoorthy & Theodore Sougiannis & Hui Zhou, 2020. "Analyst underreaction and the post‐forecast revision drift," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(9-10), pages 1151-1181, October.
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    Cited by:

    1. Taoufik Elkemali, 2024. "Intangible and Tangible Investments and Future Earnings Volatility," Economies, MDPI, vol. 12(6), pages 1-18, May.
    2. Taoufik Elkemali, 2024. "R&D Expenditures and Analysts’ Earnings Forecasts," Forecasting, MDPI, vol. 6(3), pages 1-17, July.

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