eThesis - Kauppakorkeakoulun sähköiset gradut

PURPOSE OF THE STUDY

The purpose of this thesis is to study how the anchoring bias, a cognitive bias, affects equity analysts' forecasts and what kind of implications this bias has for investors and managers of listed companies in the UK stock market. I test whether industry median forecast earnings per share can work as an anchor when analysts are estimating companies' future earnings and how this potential anchoring affects forecast errors, future stock returns, earnings surprises and stock splits.

DATA

The data I use in the study consists of analysts' forecasts from October 1990 to December 2011 for companies listed on the London Stock Exchange. This data is matched with target company's stock returns and financial statement data. The final sample consists of 222,452 firm-month observations. Analysts' earnings estimates are retrieved from Institutional Brokers' Estimate System (I/B/E/S) and the rest of the data by utilizing Thomson One Banker and Thomson Datastream.

RESULTS

The main finding is that anchoring bias plays an important role in the UK equity market. I find strong evidence that industry median forecast earnings per share affects analysts' forecasts. Analysts are anchored to this industry norm which results in biased forecasts. Analysts' forecasts for companies with a high (low) forecast earnings per share relative to their industry median are more pessimistic (optimistic) than justified by the fundamentals of the company. Furthermore, investors seem to be affected by these biased forecasts as future stock returns are higher (lower) for companies whose forecast earnings per share is above (below) the industry median. In addition, this holds true especially around earnings announcement dates when company's true profitability is revealed.