Short‐Term Institutions, Analyst Recommendations, and Mispricing: The Role of Higher Order Beliefs

We document that stocks have optimistic (pessimistic) consensus recommendations and are currently held by many short-term institutions exhibit large stock-return reversals: Their past outperformance (underperformance) is followed negative (positive) future alphas. The predictable return reversals originate from overreaction to recommendation releases the correction of these overreactions around releases. Results stronger when earnings news released at firms with higher fundamental uncertainty. Further, more show announcement returns price drift after changes. Our results consistent models order beliefs where coordinate trading public signals.