Investor attention to rounding as a salient forecast feature

Abstract

Prior research suggests that investors focus on subsets of more salient information when making economic decisions. We extend this research by examining the variation in investor responses to a salient feature of analyst forecasts. We focus on the roundness of analyst forecasts as a salient signal of imprecision. We examine whether: (1) investors notice rounding, even though it is binary and potentially has limited information content, (2) the investor reaction to rounding is affected by its repetition, and (3) the investor reaction to rounding varies by investor type. We document a weaker market reaction to rounded forecasts than to non-rounded forecasts, which is consistent with investors using rounding as an indicator of lower forecast precision. The investor response to rounding is more pronounced in the presence of multiple rounded forecasts, disclosed in analyst reports simultaneously, and is attributed primarily to less sophisticated investors. We also provide evidence of investors’ delayed assimilation of the information contained in rounded forecasts subsequent to the forecast announcement date. Our results shed light on the scope of limited investor attention.