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Measuring Herding and Exaggeration by Equity Analysts and Other Opinion Sellers

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  • Zitzewitz, Eric

    (Stanford U)

Abstract

Firms and individuals who sell opinions may bias their reports for either behavioral or strategic reasons. This paper proposes a methodology for measuring these biases, particularly whether opinion producers under or over emphasize their private information, i.e. whether they herd or exaggerate their differences with the consensus. Applying the methodology to I/B/E/S analysts reveals that they do not herd as is often assumed, but rather they exaggerate their differences with the consensus by an average factor of about 2.4. Analysts also overweight their prior-period private information and thus under-update based on last period's forecast error; this under-updating helps explain the apparently conflicting over and under-reaction results of DeBondt and Thaler (1990) and Abarbanell and Bernhard (1992). A useful by-product of the methodology is a measure of the incremental information content of an analyst's forecasts. Using this measure reveals that analysts differ greatly in performance: the information content of the future forecasts of the top 10 percent of analysts is roughly six times that of the bottom 40 percent.

Suggested Citation

  • Zitzewitz, Eric, 2001. "Measuring Herding and Exaggeration by Equity Analysts and Other Opinion Sellers," Research Papers 1802, Stanford University, Graduate School of Business.
  • Handle: RePEc:ecl:stabus:1802
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    File URL: http://gsbapps.stanford.edu/researchpapers/library/RP1802.pdf
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    References listed on IDEAS

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    Cited by:

    1. Eric Zitzewitz, 2006. "Nationalism in Winter Sports Judging and Its Lessons for Organizational Decision Making," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(1), pages 67-99, March.
    2. Ottaviani, Marco & Sorensen, Peter Norman, 2006. "The strategy of professional forecasting," Journal of Financial Economics, Elsevier, vol. 81(2), pages 441-466, August.
    3. Bernhardt, Dan & Campello, Murillo & Kutsoati, Edward, 2006. "Who herds?," Journal of Financial Economics, Elsevier, vol. 80(3), pages 657-675, June.
    4. Ottaviani, Marco & Sorensen, Peter Norman, 2006. "Professional advice," Journal of Economic Theory, Elsevier, vol. 126(1), pages 120-142, January.
    5. Cornett, Marcia Millon & Tehranian, Hassan & Yalcin, Atakan, 2007. "Regulation fair disclosure and the market's reaction to analyst investment recommendation changes," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 567-588, March.
    6. Gloede, Oliver & Menkhoff, Lukas, 2011. "Financial professionals' overconfidence:Is it experience, function, or attitude?," Hannover Economic Papers (HEP) dp-428, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    7. Hirshleifer, David & Teoh, Siew Hong, 2008. "Thought and Behavior Contagion in Capital Markets," MPRA Paper 9164, University Library of Munich, Germany.
    8. repec:wsi:qjfxxx:v:04:y:2014:i:03:n:s2010139214500177 is not listed on IDEAS
    9. Nolte, Ingmar & Nolte, Sandra & Vasios, Michalis, 2014. "Sell-side analysts’ career concerns during banking stresses," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 424-441.
    10. Martinez, Jose Vicente, 2007. "Information Misweighting and Stock Recommendations," SIFR Research Report Series 59, Institute for Financial Research.
    11. Marco Ottaviani & Peter Norman Sorensen, 2002. "Professional Advice: The Theory of Reputational Cheap Talk," Discussion Papers 02-05, University of Copenhagen. Department of Economics.
    12. Danling Jiang & Alok Kumar & Kelvin K. F. Law, 2016. "Political contributions and analyst behavior," Review of Accounting Studies, Springer, vol. 21(1), pages 37-88, March.
    13. Martinez, Jose Vicente, 2011. "Information misweighting and the cross-section of stock recommendations," Journal of Financial Markets, Elsevier, vol. 14(4), pages 515-539, November.
    14. Van Campenhout, Geert & Verhestraeten, Jan-Francies, 2010. "Herding Behavior among Financial Analysts: a literature review," Working Papers 2010/39, Hogeschool-Universiteit Brussel, Faculteit Economie en Management.
    15. David Hirshleifer & Siew Hong Teoh, 2003. "Herd Behaviour and Cascading in Capital Markets: a Review and Synthesis," European Financial Management, European Financial Management Association, vol. 9(1), pages 25-66.
    16. Meub, Lukas & Proeger, Till & Bizer, Kilian & Spiwoks, Markus, 2015. "Strategic coordination in forecasting – An experimental study," Finance Research Letters, Elsevier, vol. 13(C), pages 155-162.
    17. Bizer, Kilian & Meub, Lukas & Proeger, Till & Spiwoks, Markus, 2014. "Strategic coordination in forecasting: An experimental study," Center for European, Governance and Economic Development Research Discussion Papers 195, University of Goettingen, Department of Economics.
    18. Jordi Blanes, 2003. "Credibility and Cheap Talk of Securities Analysts:Theory and Evidence," FMG Discussion Papers dp472, Financial Markets Group.
    19. Gupta-Mukherjee, Swasti, 2013. "When active fund managers deviate from their peers: Implications for fund performance," Journal of Banking & Finance, Elsevier, vol. 37(4), pages 1286-1305.
    20. Basu, Sudipta & Markov, Stanimir, 2004. "Loss function assumptions in rational expectations tests on financial analysts' earnings forecasts," Journal of Accounting and Economics, Elsevier, vol. 38(1), pages 171-203, December.
    21. Marinovic, Iván & Ottaviani, Marco & Sorensen, Peter, 2013. "Forecasters’ Objectives and Strategies," Handbook of Economic Forecasting, Elsevier.
    22. Friesen, Geoffrey & Weller, Paul A., 2006. "Quantifying cognitive biases in analyst earnings forecasts," Journal of Financial Markets, Elsevier, vol. 9(4), pages 333-365, November.

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    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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