Investor Overreaction to Analyst Reference Points

Abstract

ABSTRACTThe author documents analysts' reliance on the company-issued guidance range as a frame of reference in making their EPS forecasts. Analysts who use the guidance range as a reference may limit information diffusion to market participants by keeping their true beliefs private. The author therefore analyzes the stock market's reaction to analyst forecasting decisions, and finds that investors overreact to forecasts that are exactly equal to the minimum or maximum of the guidance range, but do not overreact to other types of forecasts. The evidence presented is most consistent with overreaction driven by overconfident investors who trade too much in the face of information uncertainty.