The Strategic Responses from Sophisticated Investors to Inaccurate Forecast of Financial Analysts

• Published in: Accounting and finance research 2018-02, Vol.7 (1), p.272
• Main Authors: Lee, Kuo-Hao, Powell, Loreen M., Nguyen, Lam, Eryilmaz, Evren
• Format: Article
• Language: English
• ISSN: 1927-5986; 1927-5994
• DOI: 10.5430/afr.v7n1p272

We examine whether there are more information based trading activities that are generated around the time of earnings announcements. We distinguish between the influence of information based traders, especially short sellers, and market information quality through the reaction of participants to new information derived from corporate earnings announcements. We find that informed traders do take advantage of overpriced stocks, and do short stocks before the confirmation of past expectations of future cash flows from corporates. We apply Standardized Unexpected Earnings (SUE) in the method and our result indicates that informed traders are more likely to take advantage of overpriced stocks, using a tool (shorting) that is not traditionally used by unsophisticated investors. We also demonstrate an unique finding that informed traders follow stock analysts not for investing advice, but to take advantage of those unsophisticated investors that buy in to the rhetoric expressed by financial analysts.