Determinants of occurrence of excessive optimism among analysts of the warsaw stock exchange

Abstract

This paper deals with the phenomenon of excessive optimism in brokerage valuations, which is manifested by one-sided errors in the valuation of securities in reference to the real price achieved by the particular stock in the horizon of one year. The phenomenon of over-optimism is complex both from the perspective of the individual characteristics of stock market analysts as well as the psychological aspects of market functioning and the mechanisms that determine the volatility of stock prices. Due to the wide range of factors affecting the occurrence of the examined phenomenon, the authors focus only on the market aspects influencing the occurrence of excessive optimism in brokerage recommendations. The research examines over 10,000 recommendations for companies from the Warsaw Stock Exchange and from more than 40 financial institutions which evaluated companies in the period 2000-2014. For the purposes of analyzes, over-optimism in valuations is defined as an overestimation of the target price in the case of positive recommendations and as an underestimation of the price decline in the case of negative ones. The results confirmed the hypotheses of the heterogeneity of the phenomenon of excessive optimism both for different economic sectors and individual financial institutions. The authors see it as a good result considering the fact that regression uses only variables related to market characteristics of the recommendations issued, omitting other spheres influencing the occurrence of excessive optimism among analysts.