PhD Lunch Seminars Rotterdam

Rex Wang (Erasmus University Rotterdam)
Tuesday, 18 September 2018

Abstract: How do analysts form beliefs? This paper documents that analysts’ expectations are influenced by the recent performance of other industries they cover. I show that negative shocks to one coverage industry lead analysts to make more pessimistic earnings forecasts for firms in another industry. Those pessimistic forecasts are less accurate and lower than the actual earnings, regardless of the relatedness between shocked industries and focal firms. These findings are consistent with the notion that analysts heuristically overgeneralize other industries’ performance and incorrectly lower their expectations based on noise rather than information. Moreover, I demonstrate that analyst overgeneralization has significant impacts on financial markets: the resulting increase in analyst disagreement induces higher trading volumes and larger return volatilities; and the resulting analysts’ pessimism leads to temporary underpricing.