Flu Epidemic, Limited Attention and Analyst Forecast Behavior

Abstract

This study provides the direct evidence that limited attention caused by exogenous distraction influences financial market participants. Specifically, we examine the changes of analyst forecast behavior during influenza epidemics when analysts are facing attention limits resulted from the distraction of experiencing flu symptoms by their family members, relatives, colleagues, and themselves. This paper finds that higher flu intensity in the New York and New Jersey region is associated with lower degree of disagreement on target-price forecasts among financial analysts. More interestingly, analysts are more likely to over-predict target-price for high-performing stocks and under-predict target-price for low-performing stocks. We verify this result using an alternative measure of exogenous distraction that limits analysts’ attention: vaccine side-effect incidence, and we find consistent evidence supporting the hypothesis that the limited attention or effort allocated to their work affects analysts’ forecast behavior; as a result, their ability to act as an important source of information revelation is reduced for at least a short period of time.