Analyst underreaction and the post‐forecast revision drift

The post‐forecast revision drift (PFRD), the phenomenon of delayed stock price reactions to analyst forecast revisions, is a well‐documented market anomaly. Prior research attributes PFRD to underreaction by investors to analyst forecast revisions. This study investigates the role of the analyst for...

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Bibliographic Details
Published inJournal of business finance & accounting Vol. 47; no. 9-10; pp. 1151 - 1181
Main Authors Chen, Po‐Chang, Narayanamoorthy, Ganapathi S., Sougiannis, Theodore, Zhou, Hui
Format Journal Article
LanguageEnglish
Published Oxford Wiley Subscription Services, Inc 01.10.2020
Blackwell Publishing Ltd
Subjects
Analyst forecast revisions
analyst underreaction
Analysts
Delayed
Earnings
Earnings forecasting
Forecasting
News
PFRD
post‐forecast revision drift
revision momentum
Revisions
Stock prices
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Summary:The post‐forecast revision drift (PFRD), the phenomenon of delayed stock price reactions to analyst forecast revisions, is a well‐documented market anomaly. Prior research attributes PFRD to underreaction by investors to analyst forecast revisions. This study investigates the role of the analyst forecast revision process itself in the PFRD anomaly. Using a large sample of US firms, we confirm prior findings of a positive serial correlation (momentum) in individual analysts’ revisions to their earnings forecasts and, based on both indirect and direct tests, document a positive association between this momentum and PFRD. Further analyses reveal that both the forecast revision momentum and PFRD vary in similar ways with respect to the nature of the news driving the revisions and the information environment. Collectively, our findings show that underreaction by individual analysts in the forecast revision process is an important contributor to the PFRD phenomenon.
Bibliography:We thank Peter F. Pope (the editor), the anonymous reviewer, Rashad Abdel‐khalik, Anwer Ahmed, Salman Arif, Mark Bagnoli, Karthik Balakrishnan, Paul Beck, Jasmijn Bol, Louis K.C. Chan, Jim Frederickson, Christi Gleason, Tim Haight, Lynn Hannan, Paul Hribar, Nicole Jenkins, Bruce Johnson, Deen Kemsley, Stephanie Laroque, Sean McGuire, Phil Shane, Nate Sharp, Pervin Shroff, Paul Spindt, Dan Stone, Ed Swanson, Sheri Tice, Senyo Tse, Hong Xie, Beverly Walther, Matthew Wieland, Dave Ziebart and seminar participants at the 2013 AAA Annual Meeting, 2013 FARS Mid‐Year Meeting, 2016 Annual MFS Conference, Athens University of Economics and Business, Cyprus University of Technology, University of Florida, University of Iowa, University of Kentucky, Texas A&M University and Tulane University for helpful comments. Theodore Sougiannis gratefully acknowledges financial support from the KPMG Professorship.
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ISSN:0306-686X
1468-5957
DOI:10.1111/jbfa.12491