Rationalizing forecast inefficiency

We show analysts’ own earnings forecasts predict error in their own forecasts of earnings at other horizons, which we argue provides a measure of the extent to which analysts inefficiently use information. We construct our measure by exploiting two sources of variation in analysts’ incentives: (i) more recent forecasts have greater salience at the time of the earnings release so accuracy incentives are higher (lower) at shorter (longer) forecast horizons and (ii) analysts have greater incentives for optimism (pessimism) at longer (shorter) horizons. Consistent with these incentives affecting the incorporation of information into forecasts, we document (i) current year forecasts underweight (overweight) information in shorter (longer) horizon forecasts and (ii) the mis-weighting is more pronounced when recent news is negative—when analysts have greater (weaker) incentives to incorporate the news into shorter (longer) horizon forecasts. Finally, returns tests suggest that forecasts adjusted for the inefficiency we document better represent market expectations of earnings.

     

The capitalization of metro rail access in urban housing markets

Increasing access to public transportation (including metro rail) can help alleviate traffic congestion and address climate and environmental priorities. Living close to a metro line may be especially important in terms of providing improved commuting options. However, proximity to metro lines can also be associated with negative externalities, such as noise and crime, that may make living near a station less desirable. One way to assess the net value that residents place on metro rail access is to examine how proximity to metro lines is capitalized into house prices. Using a hedonic spatial difference-in-differences model, we analyze the impact of proximity to the stations on the Gold and Expo Lines in Los Angeles, California, on nearby house prices. Our findings suggest that the capitalization effect is heterogeneous. Some residents value living near new metro stations, while others do not. Overall, our results provide evidence that the value residents place on metro rail access varies based on their income levels and other demographics.