Investors' Apparent Under-Weighting of Financial Analysts' Earnings Forecasts: The Role of Share Price Scaling and Omitted Risk Factors

10.6293/AQAFA.2009.07.02

Pieter T. Elgers；May H. Lo；Emily L. Xu

Earnings forecasts ； Share price scaling ； Market mispricing

Advances in Quantitative Analysis of Finance and Accounting

7期（2009 / 06 / 01）

21 - 47

英文

This paper investigates whether the market's under-weighting of financial analysts' earnings forecasts documented in Elgers et al. (2001) is driven by share price scaling and/or omitted risk factors. Our empirical findings indicate that the market's mispricing of financial analysts' forecasts of earnings is not affected either by the incorporation of share-price covariates or by the inclusion of controls for omitted risk factors. We also document that the delayed securities returns persist in more recent years and are significant only for firms that are on the short-sale side of the profitable hedge portfolios, suggesting that the hedge portfolio strategy may be difficult to implement in practical cases. Overall, these findings indicate that neither share price scaling nor omitted risk factors underlie the evidence of the market's under-weighting of financial analysts' forecasts. Further research, however, is needed to address whether the economic returns available from trading on the information in price-scaled analysts' forecasts are adequate to compensate for transaction costs and other securities market trading frictions.

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