Analysts’ Underreaction to Employee Business Outlooks

Abstract

We examine employees’ business outlooks (EBO) from Glassdoor.com, an online job search and employee review platform. We find that EBO and their seasonally adjusted changes are positively associated with one-quarter-ahead analysts’ earnings forecast revisions and forecast errors. This former finding is consistent with analysts incorporating EBO data into their forecast revisions, but the latter finding indicates that analysts underreact to information embedded in EBO about future earnings. Second, we document that analysts’ underreaction to EBO information is larger for companies with high information uncertainty than for those with low uncertainty. Finally, we find that EBO exhibits power predicting future stock returns for a sample of companies with high information uncertainty. More importantly, the predictive power of EBO is subsumed into analysts’ forecast errors. Taken together, these results are consistent with analysts’ failing to fully incorporate EBO into their earnings forecasts being one explanation for EBO exhibiting predictive power for future stock returns.

Keywords: employee business outlooks, social media, analyst forecasts, fundamental analysis, underreaction, market anomaly