The prior earnings information may cause overreaction or under-reaction by security analysts at the stock market. In a study conducted by Abarbanell and Bernard (1186), there is a possibility that information regarding earnings may send the wrong signal to security analysts. The authors argue that overreacting or under-reacting to such information is a clear indication that the past stock price movements may have not been correct. There are instances when key players in the stock market may interfere with pricing. In any case, it is the duty of security analysts to critically monitor and ensure that there are no anomalies in the valuation of stocks. In this research study, the authors are quite categorical that security analysts under-reacted to the latest earnings in the stock market when they issued the stock market forecasts. According to the authors, the anomalous post earnings announcement is a common occurrence across major stock markets. However, the level of under-reaction by the stock market analysts is partly sufficient or inadequate to account for the scale of the drift.
In spite of the above assertions by the authors, it is crucial to state that not all extreme forecasts by the stock market analysts can be considered to be overreactions towards earnings. In addition, there are certain types of stock price overreactions that have been described in the past even though they have no clear relationship with the overreactions to earnings. This implies that there are myriads of factors that may cause under-reaction to earnings at the stock market. It may not be correct to conclude that the behavior of security analysts is solely responsible for influencing pricing at the stock market. In any case, it may have no relationship with overreactions experienced in the entire stock market.
Reference:
Abarbanell, Jeffery and Victor, Bernard. “Tests of Analysts’ Overreaction / Underreaction to Earnings Information as an Explanation for Anomalous Stock Price Behavior”. The journal of finance 47.3(1992), 1181-1207. Print.