Prospect theory, analyst forecasts, and stock returns

Publication Type

Conference Paper

Publication Date

12-2003

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. See journal article version at https://ink.library.smu.edu.sg/lkcsb_research/1158/

Keywords

Behavioral finance, Prospect theory, Analyst forecasts, Earnings growth, Earnings Surprises, Underreaction, Trends

Discipline

Business | Corporate Finance | Finance and Financial Management

Research Areas

Finance

Publication

Australasian Finance and Banking Conference, Sydney, Australia, December 2003

City or Country

Sydney, Australia

Comments

See article https://ink.library.smu.edu.sg/lkcsb_research/1158/ or https://doi.org/10.1016/j.mulfin.2004.03.005

Additional URL

https://ink.library.smu.edu.sg/lkcsb_research/1158/

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