Prospect theory, analyst forecasts, and stock returns

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 a...

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Bibliographic Details
Main Author: DING, David K.
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2003
Subjects:
Online Access:https://ink.library.smu.edu.sg/lkcsb_research/738
https://ink.library.smu.edu.sg/lkcsb_research/1158/
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Institution: Singapore Management University
Language: English
Description
Summary: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/