Estimation Uncertainty and Expectation Formation: Evidence from Sell-side Security Analysts

Topic:

Estimation Uncertainty and Expectation Formation: Evidence from Sell-side Security Analysts

Time & Date:

10:30am-12:00pm, 2017/10/27

Venue:

Room 502, Daoyuan Building, CUHK(SZ)

Speaker:

Rui Shen, Nanyang Technological University

Detail:

Without assuming agency incentives or behavioral bias, this study provides a novel explanation for why agents fail to incorporate existing information efficiently (under reaction) by considering estimation uncertainty. Using earnings forecasts issued by sell-side security analysts, we provide empirical evidence consistent with the predictions of the analytical framework. The evidence shows that the magnitude of under reaction increases with the degree of estimation uncertainty. Further analyses using machine-learning forecasts and individual analyst forecasts show that our results cannot be explained by any existing theories. Taken together, this paper suggests that it is important to consider estimation uncertainty in expectation formation process.