Title

Prospect Theory, Analyst Forecast, and Stock Returns

Publication Type

Journal Article

Publication Date

2004

Abstract

This paper documents how prospect theory can be used to explain stock returns and analysts' forecast behavior. Positive earnings surprises are associated with increases in abnormal returns but negative earnings surprises have only a limited negative impact on returns. We find that analysts display asymmetric behavior towards positive and negative earnings growth. Analysts' forecasts are found to be accurate during periods of positive earnings growth, but overly optimistic during periods of negative earnings growth. Our findings have implications for the structuring of investment products, as well as the role of market timing in their introduction.

Discipline

Business

Research Areas

Finance

Publication

Journal of Multinational Financial Management

Volume

4-5

Issue

4-5

First Page

425

Last Page

422

ISSN

1042-444X

Identifier

10.1016/j.mulfin.2004.03.005

Publisher

Elsevier