Towards New Institutionalism of Market Efficiency: Limited Attention, Analyst Forecasts, and Stock Prices

• In Event: 118 - Section on Economic Sociology Refereed Roundtable Session and Business Meeting
  In Refereed Roundtable 60min: Table 22. Valuation

Abstract

Post-earnings announcement drift (PEAD), i.e. stock price’s delayed response to earnings news, is a well-documented evidence of market inefficiency. One argument for PEAD is that (sell-side) analysts, an important information intermediary, fail to process earnings news. In this study, we take a new institutionalism approach and investigate the context-bound rationality of sell-side analysts. Specifically, we examine the attention-limiting role of competing tasks (earnings announcements/forecasts for portfolio firms) and distracting events (earnings announcements for non-portfolio firms) in influencing analysts’ earnings forecasts for firms. Using a sample of 5,136 public firms and 10,798 analysts over 2000-2012, we find the following. First, competing tasks worsen analysts’ forecast accuracy (FA), whereas distracting events do not seem to affect analysts’ FA. Second, analysts’ competing tasks delay firms’ price adjustment after earnings announcements. Overall, our findings suggest that analysts’ limited attention impedes their task performance as well as market efficiency. Thus, sociological approaches towards modeling prices can expand our understanding of stock prices and market efficiency.

Authors

• Rajib Hasan, University of Houston-Clear Lake

• Abdullah Shahid, Cornell University