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Lured by the Consensus

We find that investors are fixated on analysts’ consensus outputs (earnings forecasts, recommendations, and forecast dispersion), which can be inferior signals compared to the corresponding outputs provided by high-quality analysts, especially when a large number of high-quality analysts follow the firm. This result, which holds at the firm and market level, implies inefficient use of the information contained in analysts’ outputs. Further, the post-earnings announcement drift (PEAD) phenomenon occurs only when high-quality analysts are more uncertain about the firm’s performance than all analysts following the firm. We conclude that the market’s fixation on consensus measures has significant negative economic implications.