Abstract
We examine the effect of economic policy uncertainty (EPU) on sell-side analysts’ forecasts, the allocation of attention, and the stock market reaction to earnings news. We find that periods of high EPU are associated with higher analyst disagreement and a decrease in forecast accuracy. Specifically, we show that analysts issue on average more pessimistic forecasts when EPU is high. Second, we show that higher levels of EPU are associated with higher attention to the overall stock market and lower firm-level attention, in line with category learning behavior. Forecast errors also have a larger firm-specific component during periods of high EPU. Finally, we show that the trading volume and price responses to earnings announcements hardly depend on EPU. Hence, investors tend to follow analyst forecasts, thereby failing to incorporate a predictable bias.
Original language | English |
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Article number | 100883 |
Pages (from-to) | 1-17 |
Number of pages | 17 |
Journal | Journal of Behavioral and Experimental Finance |
Volume | 41 |
Early online date | 13 Dec 2023 |
DOIs | |
Publication status | Published - Mar 2024 |
Bibliographical note
Funding Information:☆ We are grateful to Jack Bekooij for excellent assistance in collecting the research data. We thank participants of the International Atlantic Economic Conference 2019 (Miami); the Australasian Finance and Banking Conference 2020 (virtual); the International Conference of the French Finance Association 2021 (virtual); the European Financial Management Association Annual Meeting 2021 (virtual); the Eastern Finance Association Annual Meeting 2022 (Washington D.C.); the Financial Management Association Global Conference (Doctoral Consortium) 2022 (Dubai); and seminar participants at De Nederlandsche Bank for their helpful comments.
Publisher Copyright:
© 2023 The Author(s)
Keywords
- Analyst forecasts
- Earnings announcements
- Economic policy uncertainty
- Limited attention