Analysts' Use of Returns Leads to Market Mispricing and Forecast Errors
Analysts use returns in their earnings forecasts even when those returns don't have useful earnings information. This leads to forecast errors, especially for inexperienced analysts and those with reduced attention. The market can't predict these errors, causing mispricing until earnings are announced. The study uses a new method to isolate non-earnings information in Federal Open Market Committee announcements and separate out other data using intraday and instrumented returns.