Characteristics of Price Informative Analyst Forecasts

Abstract

We examine the effect of signal attributes and analyst identity on the price impact of an earnings forecast revision. We measure the price impact immediately upon the release of a forecast, as well as over the next twenty-four months. We find that an analyst's own prior forecast and the consensus forecast at the time of the release are both important in determining the price impact of a revision. Specifically, "confirming" signals (revisions that are above (or below) both the prior consensus and the analyst's own prior forecast) have much greater price impact than "conflicting" signals (revisions that are in between the prior consensus and the analyst?s own prior forecast).

We document a substantial post-revision price drift after the release of confirming signals. Upward (downward) confirming revisions are associated with higher (lower) future size-adjusted returns. The predictive power of these confirming revisions is large even after controlling for price momentum, firm size, and the B/M ratio. The main predictive power derives from the direction of the confirming signal. Controlling for the direction of the revision, the magnitude of the revision is unimportant in return prediction.

We also examine the relation between analyst identity and price impact. Specifically, we evaluate the incremental price effect associated with revisions issued by Institutional Investor All-Stars, Wall Street Journal Award Winners, and analysts deemed to be more accurate by the Park and Stice (2000) algorithm. We find that the immediate price respond is greater for revisions issued by all the "superior" analysts. In the following months, revisions by II-All Stars exhibit weaker price drifts, and revisions by the Park and Stice (2000) analysts exhibit stronger price drifts. However, taken together, signal attributes are more important than analyst identity in the prediction of subsequent stock returns.

Keywords: Analyst, earnings forecasts, estimates, revisions, mMomentum market efficiency, expected returns, investments

JEL Classification: G12, G14, G21, G24, G29, M41