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Stock market reactions and optimism bias in analysts’ earnings forecasts: An analysis of China's stock markets

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  • Ji, Xu
  • Dong, Yan
  • Vagnani, Gianluca
  • Yang, Xiaoqi

Abstract

This paper examines analysts’ catering behavior to current investor demand, proxied by the unbalanced stock market reaction toward optimistic forecasts and non-optimistic forecasts (i.e., optimism premium). Using data on earnings forecasts issued by sell-side analysts in China from 2014 to 2018, we show that the optimism premium significantly increases analysts’ tendency to issue optimistic forecasts—in short, that analysts do cater to investor demand. The implications of our findings for theory and practices are discussed.

Suggested Citation

  • Ji, Xu & Dong, Yan & Vagnani, Gianluca & Yang, Xiaoqi, 2024. "Stock market reactions and optimism bias in analysts’ earnings forecasts: An analysis of China's stock markets," Finance Research Letters, Elsevier, vol. 59(C).
    • Handle: RePEc:eee:finlet:v:59:y:2024:i:c:s1544612323011947
    DOI: 10.1016/j.frl.2023.104822
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    More about this item

    Keywords

    Financial analysts’ earnings forecast; Optimism premium; Catering behavior; Conflict of interest;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • J44 - Labor and Demographic Economics - - Particular Labor Markets - - - Professional Labor Markets and Occupations

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