Distress risk puzzle and analyst forecast optimism
| Autor: | K.C. Kenneth Chu, Sophia Weihuan Zhai |
|---|---|
| Rok vydání: | 2021 |
| Předmět: |
050208 finance
Earnings media_common.quotation_subject education 05 social sciences 050201 accounting Monetary economics Quarter (United States coin) General Business Management and Accounting Market response Corporate finance Optimism Accounting 0502 economics and business Economics Distress risk health care economics and organizations Finance media_common |
| Zdroj: | Review of Quantitative Finance and Accounting. 57:429-460 |
| ISSN: | 1573-7179 0924-865X |
| Popis: | A general consensus in the literature is that financial analysts make optimistic forecasts. That is, they tend to underreact to negative but overreact to positive information. In this study, we invoke this idea to provide an explanation for the distress risk puzzle, the phenomenon that high distress risk firms deliver anomalously low subsequent returns. We find that analysts underestimate the implication of the poor performance of higher distress risk firms, and thus make EPS and sales forecasts that are generally more optimistic than those for the lower distress risk firms. Because market respond to the analyst forecasts, investors initially overvalue the high distress risk firms; later on, when those firms report less than expected performance, analysts revise their forecasts downwards that in turn cause the high distress risk firms to earn low future returns composing of both immediate-forecast-revision responses and post-forecast-revision price drifts. We further document that (quarter) earnings announcements convey a substantial amount of information that roughly drives more than 60% of the analyst forecast revisions and 30% of the revision-related market responses. |
| Databáze: | OpenAIRE |
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