Wall street watches Washington: Asset pricing implications of policy uncertainty

Ralph C. Verhoeks, Willem F.C. Verschoor*, Remco C.J. Zwinkels

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review

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 languageEnglish
Article number100883
Pages (from-to)1-17
Number of pages17
JournalJournal of Behavioral and Experimental Finance
Volume41
Early online date13 Dec 2023
DOIs
Publication statusPublished - 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

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