Did Analysts Learn? -- A Rationality Analysis

Abstract

In this study we examine changes of behaviors of financial analysts in earnings forecasts in the aftermath of the stock market price boom led by high tech related shares, which ended in early year 2000. We have found that, in the period prior to year 2000, financial analysts were in general over-optimistic and underreactive, meaning slow in correcting previous errors, in earnings forecasts. These behaviors were especially profound for firms in the high tech related sectors. But these phenomena went into reversal in the post-2000 period. Specifically, we have found that analysts became over-pessimistic, and were especially so for high tech firms. Analysts also tended to be much less under-reactive and showed stronger proclivity to overreact. The concept of behavioral instability and the statistical techniques for testing behavioral changes in analysts’ earnings forecasts explained in this study have useful applications and implications to research work on broader financial topics.