S&P 500 Index Inclusions and Analysts’ Forecast Optimism

Abstract

The authors examine analyst behavior surrounding the announcements of S&P 500 Index inclusions. Their main objective is to understand how analysts react to such announcements and whether analysts’ forecast estimates are overly optimistic following inclusions. The results indicate that analysts overreact to S&P 500 addition announcements; in the sample of newly added companies studied in this article, analyst earnings forecasts are found to be overoptimistic. The results also show a significant decrease in analyst forecast accuracy and higher inter-analyst forecast dispersion. These findings are important for investors who use analysts’ earnings forecasts to make investment decisions about companies that are newly added into the S&P 500. Investors should be cautious about making investment decisions based on analysts’ earnings forecasts as the forecasts tend to be upward biased (optimistic) and less accurate. The authors conclude that the credibility of analysts’ earnings forecasts for S&P 500–added firms may be altered.

TOPICS: Security analysis and valuation, statistical methods, quantitative methods