Investor Attention to Salient Features of Analyst Forecasts

Abstract

Prior research suggests that, when making economic decisions, investors focus on subsets of more salient information. We extend this research by examining variation in investor response to a salient feature in 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 has potentially limited information content, 2) investor reaction to rounding is affected by its repetition, and 3) investor reaction to rounding varies by investor type. We document a weaker market reaction to rounded compared to non-rounded forecasts, consistent with investors using rounding as an indicator of less precise forecasts. Investor response to rounding is more pronounced in the presence of multiple rounded forecasts, simultaneously disclosed in analyst reports, and is primarily attributed to less sophisticated investors. We also provide evidence on investors’ delayed assimilation of the information content in rounded forecasts subsequent to the forecast announcement date. Our results shed light on the scope of limited investor attention.