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Keywords:

  • Analyst under-reaction;
  • Self-selection;
  • Cognitive bias;
  • Earnings forecasts;
  • Financial analysts

Abstract

Prior studies suggest that analysts under-react to past information (Klein, 1990; Abarbanell and Bernard, 1992; Easterwood and Nutt, 1999). We examine whether evidence interpreted as analyst under-reaction to negative news can be attributed to analyst self-selection. Analyst self-selection arises when analysts' information production efforts are focused toward stocks that analysts expect to perform well. Using a large sample of firms for the period of 1983–2004, we find evidence suggesting that self-selection is responsible, at least in part, for analyst under-reaction to past negative information about the firm's performance.