Analyst forecast optimism and market reaction: Australian Evidence

Abstract

This paper examines whether earnings forecasts within the Australian context suffer from analysts’ optimism and under- or overreaction to new information in forecast revisions, and also whether and how investors respond to analysts’ bias in a given forecast. Our findings indicate that Australian analysts are optimistic and underreact both to positive and negative forecast revisions. We also find that when making investment decisions, investors are unable to distinguish the predictable component of forecast bias from the unpredictable component, although they are aware of the overall optimism in analysts’ forecasts and adjust for that.