I empirically study whether strong signals counteract the effects of confirmation bias in sell-side analysts’ stock price forecasts when these signals are contradictory. I use target prices to measure forecast bias and the growth in Earnings Per Share as signals, and regress analysts’ forecast bias over different deciles of high signals interacted with prior negative forecast bias in a dynamic panel data model. I find that analysts underreact to favorable signals when the prior is pessimistic, except for sufficiently strong signals which cause analysts to issue more optimistic target prices. Also, that analysts underreact to low signals, except for sufficiently low signals.
