Delayed Security Price Adjustments to Financial Analysts' Forecasts of Annual Earnings

Posted: 11 Jul 2001

See all articles by Pieter T. Elgers

Pieter T. Elgers

University of Massachusetts

May H. Lo

Western New England College

Ray J. Pfeiffer

Texas Christian University - Neeley School of Business

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Abstract

This paper documents that the weighting of analysts' annual earnings forecasts implicit in security prices is lower than the historical relation between financial analysts' forecasts and realized earnings. Short positions in securities in the bottom decile and long positions in the top decile of the cross-sectional distribution of analysts' early-in-the-year earnings forecasts generate significant hedge-portfolio returns in the year after portfolio formation. This delayed price response is more pronounced for firms with relatively low analyst coverage, consistent with the premise that low financial analyst coverage is associated with a variety of factors that impede the information efficiency of the security market. The hedge-portfolio returns concentrate in the months of subsequent quarterly earnings announcements, suggesting that the delayed security price adjustments reflect the market's failure to incorporate information in analysts' forecasts about future earnings, rather than deficiencies in our conditional expectations of security returns.

Keywords: Earnings forecasts; Market mispricing; Financial analysts coverage

JEL Classification: G14, G29, M41

Suggested Citation

Elgers, Peiter D. and Lo, May H. and Pfeiffer, Ray J., Delayed Security Price Adjustments to Financial Analysts' Forecasts of Annual Earnings. Available at SSRN: https://ssrn.com/abstract=272322

Peiter D. Elgers

University of Massachusetts ( email )

Isenberg School of Management Department of Accounting and Information Systems
Amherst, MA 01003
United States
413-545-5648 (Phone)
413-545-3858 (Fax)

May H. Lo

Western New England College ( email )

1215 Wilbraham Road
Springfield, MA 01119
United States
413-782-1369 (Phone)
413-782-2068 (Fax)

Ray J. Pfeiffer (Contact Author)

Texas Christian University - Neeley School of Business ( email )

TCU Box 298530
Fort Worth, TX 76129
United States
817-257-6435 (Phone)

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