How economic uncertainty influences the performance of investor perceptions and behavior

Abstract

In the presence of high uncertainty and asymmetric information, firms might opportunistically shift earnings from uncertain to more certain times. Thus, this paper examines how investor perceptions and risk-taking behavior fluctuate under high economic uncertainty and how earnings quality influences stock return synchronicity and analyst forecast accuracy during periods of high uncertainty. Using a large sample obtained from 24 countries worldwide over the period from 1997 to 2017, we find that investors take a bearish attitude and stocks are more synchronized during years with high economic uncertainty. Furthermore, we find a negative association between analyst forecast accuracy and economic uncertainty. Second, a low level of investor protection indicates a low level of market sentiment. Third, stocks become more synchronous and analyst forecasts are more accurate during periods of high investor sentiment and in the presence of higher levels of earnings quality. Fourth, higher stock return synchronicity implies greater analyst forecast accuracy. Overall, we show that all these effects are more intense during periods of high economic uncertainty.