Does uncertainty boost overconfidence? The case of financial analysts' forecasts

Abstract

Purpose -This article aims to examine the link between uncertainty and analysts' reaction to earnings announcements for a sample of European firms during the period 1997-2007. In the same way as Daniel et al., the authors posit that overconfidence leads to an overreaction to private information followed by an underreaction when the information becomes public. Design/methodology/approach -In this study, the authors test analysts' overconfidence through the overreaction preceding a public announcement followed by an underreaction after the announcement. If overconfidence occurs, over-and underreactions should be, respectively, observed before and after the public announcement. If uncertainty boosts overconfidence, the authors predict that these two combined misreactions should be stronger when uncertainty is higher. Uncertainty is defined according to technology intensity, and separate two types of firms: high-tech or low-tech. The authors use a sample of European firms during the period 1997-2007. Findings -The results support the overconfidence hypothesis. The authors jointly observe the two phenomena of under-and overreaction. Overreaction occurs when the information has not yet been made public and disappears just after public release. The results also show that both effects are more important for the high-tech subsample. For robustness, the authors sort the sample using analyst forecast dispersion as a proxy for uncertainty and obtain similar results. The authors also document that the high-tech stocks crash in 2000-2001 moderated the overconfidence of analysts, which then strongly declined during the post-crash period. Originality/value -This study offers interesting insights in two ways. First, in the area of financial markets, it provides a test of a major over-and underreaction model and implements it to analysts' reactions through their revisions (versus investors' reactions through stock returns). Second, in a broader way, it deals with the link between uncertainty and biases. The results are consistent with the experimental evidence and extend it to a cross-sectional analysis that reinforces it as pointed out by Kumar.

Overreaction and underreaction anomalies in the Indonesian stock market: a sectoral analysis

“…The presence of overreaction in the European stock market was examined by Bessière and Elkemali (2014). Specifically, they examine the link between uncertainty and analysts’ reaction to earnings announcements during the period 1997-2007, and their findings support the overconfidence hypothesis.…”

“…In the advanced stock markets, the studies on the overreaction anomaly have been investigated by Abebe Assefa et al (2014); Chung et al (2015) and Piccoli et al (2017) in the USA; Bessière and Elkemali (2014) in Europe; and Durand et al (2013) in Australia. Abebe Assefa et al (2014) found stock market overreaction for a sample of the large US firms; thus, the contrarian strategy was relevant to rebalancing investment portfolios into this market.…”

“…Additionally, Piccoli et al (2017) found that the stocks in the USA tend to overreact to both positive and negative events but in a more pronounced way in the latter case over the 1926-2013 period. The overreaction anomaly was also present in the European stock market during the 1997-2007 period when the information was not been made public, but it disappeared just after public release (Bessière and Elkemali, 2014). Meanwhile, the personality traits have been found to be associated with overconfidence and overreaction in the Australian financial markets (Durand et al , 2013).…”

Issues That Matter When Behavioral Finance Factors Drive the Largest Initial Public Offering in the Saudi Financial Market

“…The overconfidence bias among investors might produce an underestimation of the risk exposure and create aggressive decisions, which can be reflected in IPO investment decisions (Odean, 1998). Moreover, the success of most IPO behavior decisions in the Saudi financial market enhances investors' beliefs that they make better investment decisions than everyone else, which leads to overconfidence bias among Saudi investors about new IPO investment decisions (Bessière and Elkemali, 2014).…”

Market Overreaction Saham Lq-45 Terhadap Pengumuman Asian Games Ke-18

“…Kejadian penyimpangan overreaction sebelumnya telah diteliti secara empiris di seluruh dunia, misalnya Durand et.al (2013), Bessière dan Elkemali (2014) dan Piccoli et al (2017). Durand et al (2013) meneliti gejala overreaction yang terjadi di pasar keuangan Australia.…”