Research On The Impact Of Extremely Negative Events On Analyst Sentiment

Security analysts play an important role in the capital market as information intermediaries,gathering,analyzing and transferring market information.Prior studies have discussed the analysts' behaviors and one of the most important topics of them is analysts' optimistic bias when recommending or forecasting earnings.These studies show that analysts have motivation to be overoptimistic even if their job requires rational judgement.Keeping overoptimistic has become a rational choice for analysts.Lots of related studies have discussed the optimistic bias,while little of them focuses on the pessimistic mood of analysts under some specific circumstances.This paper will explore the pessimistic mood of analysts.Specifically,this paper will empirically test the impact of extremely negative events on analyst sentiment,studying how analysts respond to extremely events when over-optimism exists pervasively in the market.Earthquake events are more exogeneous in contrast to other natural disaster events or negative social economy events.Using earthquake events as negative shocks,this paper assigns listed firm into treatment group and control group according to whether a province where the listed firms locate experience earthquakes.To mitigate the concern of sample selection bias,propensity score matching is adopted to further select firms in treatment and control groups and a difference-in-difference strategy is used to evaluate the effect of extremely negative events on analyst sentiment.The findings suggest that if a listed firm,covered by analysts,locate in a province having just experienced a severe earthquake,the optimistic degree of relevant analysts will decline,expressing pessimism in some extent.Further studies show that earthquakes don't have significant and lasting negative influence on corporate operations and stock returns.Pessimistic sentiment of analysts is the result of heuristic bias,manifesting as using heuristics methods for forecasting earnings.These findings indicate that the pessimistic sentiment of analysts mainly comes from behavior bias rather rational judgement.The possible contributions of this paper are listed as followed.Firstly,prior literatures mainly focus on analyst optimistic bias and pay little attention to analysts' negative sentiment in some specific situations.This paper discusses the pessimism of analysts,filling in the blank which related researches overlook.This paper finds that the occurrence of earthquake leads to the analysts' pessimistic tendency exhibited in earnings forecast and further discusses the mechanism how this negative sentiment generates.Secondly,prior literatures related to behavior biases of analyst pay little attention to how heuristic biases affect analyst behaviors.This paper suggests that analysts use heuristics for forecasting earnings,expanding the application of behavioral science in discussing analyst behaviors.In addition,this paper finds that the heuristic bias leads analysts to overreact to negative information caused by extremely negative events if the occurrence of these events hasn't produced significant negative influence on related firms.Extremely negative events may overly raise the weight of negative information in the earnings forecasts and this finding thus enriches the discussion about the informativeness in analyst forecasts.Finally,emerging market countries have a short history of capital market development,and market participants' lack of experience makes them vulnerable to irrational factors such as emotions.Therefore,the conclusions of this paper can also provide market managers in emerging market countries with information about the micro-behavior characteristics of market participants.