A study on the impact of anchoring bias on analyst forecasts in Indian markets

Abstract

We test the prevalence of anchoring bias in analyst forecasts of EPS in the Indian markets. For our study, we hypothesize that the expectations of the analysts could be anchored in 2 numbers: the forecasted sector median EPS and the forecasted median EPS growth rate of firms in the sector. Due to the prevalence of these anchors, we hypothesize that analyst forecasts tend to be optimistic (pessimistic) for firms whose forecasted EPS/EPS growths are lower (higher) than the sector median forecasted EPS/EPS growth. We find that in the Indian context, the presence of anchoring bias in not significant and the impact of the anchor on the EPS forecast of analysts is ambiguous. We further conducted a sector-wise study to see if the presence of this bias is different in different sectors in India. We find that the presence of anchoring bias is again not significant and the impact of the anchor on the EPS forecast of analysts is ambiguous. However, these results can’t be used to suggest complete non -existence of such biases. We believe that the insignificance of results could be driven by factors like low market efficiency (information availability and sharing, coverage of stocks by analysts, analyst rankings), and volatility of earnings in the post 2008 period. It is possible that the accuracy of the forecasts of analysts was adversely affected by these factors because of which the impact of the anchoring bias on their forecast accuracy wasn't visible.