Dynamic Change of Analyst Cross-Sectional Anchoring Bias

Anchoring behavior is widespread in the population, and analysts are no exception. According to Cen et al. (2013), analysts are influenced by the median value of firms’ industry when estimating future firm performance. They used cross-sectional anchoring bias (CAF) to describe the difference between consensus-forecast EPS and its industry median. Based on a fixed-effect panel regression, we discover strong evidence for the negative relationship between CAFt and its future change (ΔCAFt+1). The effect is stronger when analysts are less knowledgeable. Meanwhile, current change of anchoring bias (ΔCAFt) can provide additional information even when forecasting stock returns with CAFt and other commonly used factors together. Finally, we discover that the positive relationship between CAFt and future stocks return is more substantial when ΔCAFt is negative. Generally, this study highlights the dynamic change process in analysts’ cross-sectional anchoring bias and the impact of this change on the asset-pricing power of the crosssectional anchoring bias factor