First Impression Bias: Evidence from Analyst Forecasts

First Impression Bias: Evidence from Analyst Forecasts
David Hirshleifer, Ben Lourie, Thomas G Ruchti, Phong Truong
Review of Finance, Volume 25, Issue 2, March 2021, Pages 325–364,

We present the tests for first impression bias among professionals in the field. We find that equity analysts suffer from first impression bias in their forecasts, price targets, and recommendations. If a firm performs particularly well in the year before an analyst starts following that firm, the analyst subsequently issues optimistic EPS forecasts. Similarly, if the firm performs particularly poorly, the analyst issues pessimistic forecasts. Consistent with the pervasive negativity bias found in the psychology literature, we find that negative first impressions are associated with larger and more persistent effects. Evidence from stock returns suggests that the market initially adjusts only partially for this behavioral bias in reacting to analyst recommendations, and that full adjustment takes several months.

Finally, we show that a set of professionals in the field, equity analysts, apply U-shaped weights to their sequence of past experiences, with greater weight on first experiences and recent experiences than on intermediate ones. Our findings suggest a possible practical implication for the management of finance professionals. For example, when assigning analysts to follow a particularly successful or unsuccessful firm, brokerages may benefit from designing procedures to compensate for the first impression biases of analysts in generating future forecasts, price targets, and recommendations.

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