Analysts and Anomalies

Posted: 23 Mar 2017 | Last revised: 15 Aug 2019

Joseph Engelberg
University of California, San Diego (UCSD) – Rady School of Management

R. David McLean
Georgetown University – Department of Finance

Jeffrey Pontiff
Boston College – Department of Finance

Matthew C. Ringgenberg
University of Utah – Department of Finance

Abstract

Analysts’ price targets and recommendations contradict stock return anomaly variables. Using an index based on 125 anomalies, we find that analysts’ annual stock return forecasts are 11% higher for anomaly-shorts than for anomaly-longs. Anomaly-shorts’ return forecasts are excessively optimistic, exceeding realized returns by 34%. Recommendations also tend to be more favorable for anomaly-shorts, although this result varies across anomaly types. Consistent with analysts’ slowly incorporating anomaly information, anomalies forecast revisions in both price targets and recommendations. Our findings imply that investors who follow analysts’ actionable information contribute to mispricing.

 

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