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Market vs. analysts reaction: the effect of aggregate and firm-specific news

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  • Michele Bagella
  • Leonardo Becchetti
  • Rocco Ciciretti

Abstract

Firm-specific and aggregate shocks generate reassessment of investors and analysts expectations on earnings forecasts and on the fundamental value of equities. In this article, we evaluate the effects of this combined reaction on the implied equity risk premium extracted from a standard two-stage dividend discount (DD) model. If investors and analysts revisions coincide, and in absence of measurement errors in the DD formula, the observed shocks should not have any significant impact on prices and Implied Equity Risk Premium (IEPR). On the contrary, in an analysis based on data for all S&P 500 COMPOSITE INDEX constituents from 1990 to 2003, we observe substantial overreaction of investors to both downward and upward firm-specific forecast revisions, plus overreaction to changes in GDP and to the announcements of the Consumer and Business Confidence indicator. We also observe that positive overreaction to upward earning forecast revisions and GDP changes falls after the stock bubble burst, while overreaction to upward forecast revision and to announcements of the Consumer Confidence Index looses significance after the 9/11 terrorist attack. These findings are broadly consistent with the hypothesis of reduced participation of uninformed (noise) traders to financial markets after these two shocks.

Suggested Citation

  • Michele Bagella & Leonardo Becchetti & Rocco Ciciretti, 2007. "Market vs. analysts reaction: the effect of aggregate and firm-specific news," Applied Financial Economics, Taylor & Francis Journals, vol. 17(4), pages 299-312.
  • Handle: RePEc:taf:apfiec:v:17:y:2007:i:4:p:299-312
    DOI: 10.1080/09603100600690051
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    Cited by:

    1. Fabrizio Mattesini & Leonardo Becchetti, 2009. "The stock market and the Fed," Applied Financial Economics, Taylor & Francis Journals, vol. 19(2), pages 99-110.
    2. Michele Bagella & Rocco Ciciretti, 2009. "Financial markets and the post-crisis scenario," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 56(3), pages 215-225, September.

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