Mood and Analyst Optimism and Accuracy* YUK YING CHANG, Massey University** WEI-HUEI HSU, Massey University The first version: 26 May 2015 This version: 11 August 2016 * We thank Ling Cen for helpful suggestions. We also thank Kee-Hong Bae, Michael Brennan, Bei Cui, Sudipto Dasgupta, Gilles Hilary, Peter Joos, Hongping Tan, Xiaoyun Yu, and the participants at the 2016 FMA Asia/Pacific Conference, the 2016 Asian Finance Association Conference and the seminar of Massey University. We acknowledge Andrea Bennett for proofreading our drafts and Massey Business School for providing financial support. ** The corresponding author. Address: School of Economics and Finance, Massey University Manawatu, Private Bag 11 222, Palmerston North 4442, New Zealand. Phone: +64 6 3569099 Ext 84073. Email:
[email protected]. Page 1 of 78 Mood and Analyst Optimism and Accuracy ABSTRACT Does mood affect prediction performance? When analysts are in a positive (negative) mood, do they make more positively (negatively) biased and less (more) accurate forecasts? This study provides supportive evidence. Specifically, we find that analyst forecasts are more optimistic and have larger errors near holidays, but more pessimistic and have smaller errors when there is a disaster with significant fatalities. We further show that these results are neither driven by sentiment associated with contemporaneous economic or market conditions, nor by under- reaction or over-reaction to more bad news released on days immediately before weekends or holidays. JEL codes: G24, G14, D03, G02 Keywords: forecast optimism, forecast accuracy, mood, analysts Page 2 of 78 1 Introduction Conventionally, people are assumed to be fully rational.