Investors' Use of Historical Forecast Bias to Adjust Current Expectations

We explore the extent to which investor response to earnings information differs in the presence of historical bias in earnings forecasts. Overall, the results are consistent with the notion that investors take historical forecast bias into account when interpreting information in earnings announcements and that the market's reaction to forecast errors is larger (less negative) when forecasts are historically more optimistic and suggests that the functional form commonly used in the earnings response literature does not appropriately capture the effect of real unexpected earnings information (i.e., investors' expectation errors as opposed to analysts' forecast errors) on stock returns. Copyright (c) 2010, The Eastern Finance Association.