Abstract
Research in neuropsychology shows that the human brain processes differently small and large numbers. In this paper, we show that financial analysts process differently small prices and large prices, when they issue target prices one-year ahead. First, analysts are more optimistic about small price stocks than large price stocks, even after controlling for risk factors. Second, we strengthen these results by showing that target prices become more optimistic after stock splits. Finally, we find that the link between risk-adjusted implied returns and stock prices survives after controlling for rounding, the 52-week high bias, the coverage of distressed firms and analysts' characteristics. Overall, our results suggest that a deeply-rooted behavioral bias in number processing explains a significant part of analysts' forecast errors.
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