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Investor Sentiment and Analysts' Earnings Forecast Errors

Author

Listed:
  • Paul Hribar

    (Tippie College of Business, University of Iowa, Iowa City, Iowa 52242)

  • John McInnis

    (McCombs School of Business, University of Texas at Austin, Austin, Texas 78712)

Abstract

We correlate analysts' forecast errors with temporal variation in investor sentiment. We find that when sentiment is high, analysts' forecasts of one-year-ahead earnings and long-term earnings growth are relatively more optimistic for "uncertain" or "difficult-to-value" firms. Adding these forecast errors to a regression of stock returns on sentiment absorbs a sizable fraction of the explanatory power of sentiment for the cross section of future returns. This finding provides direct support for the notion that investor sentiment affects the earnings expectations of hard-to-value firms. Additional tests suggest that this bias in expectations is unlikely to be strategic in nature. Our results provide new insight into the mechanism through which investor sentiment affects returns. This paper was accepted by Brad Barber, Teck Ho, and Terrance Odean, special issue editors.

Suggested Citation

  • Paul Hribar & John McInnis, 2012. "Investor Sentiment and Analysts' Earnings Forecast Errors," Management Science, INFORMS, vol. 58(2), pages 293-307, February.
    • Handle: RePEc:inm:ormnsc:v:58:y:2012:i:2:p:293-307
    DOI: 10.1287/mnsc.1110.1356
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    References listed on IDEAS

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