Why do analysts issue forecast revisions inconsistent with prior stock returns? Determinants and consequences

Xiaobo Dong; Kuan Chen Lin; Roger Graham

doi:10.1111/acfi.12101

Why do analysts issue forecast revisions inconsistent with prior stock returns? Determinants and consequences

Xiaobo Dong, Kuan Chen Lin, Roger Graham

Research output: Contribution to journal › Article › peer-review

5 Scopus citations

Abstract

We examine the informativeness of analyst forecast revisions that are directionally inconsistent with prior stock price movements (sign-inconsistent revisions). Sign-inconsistent revisions represent approximately one-half of the forecast revisions from 1995 through 2010. Our tests indicate that sign-inconsistent revisions are less informative than are sign-consistent revisions. Sign-inconsistent revisions are less likely to be closer to actual earnings realizations and they generate smaller stock price reactions. We also find evidence that sign-inconsistent revisions are associated with analysts' economic incentives to generate trading volume and their behavioural limitations related to information uncertainty. These results suggest that sign-inconsistent revisions do not necessarily benefit investors.

Original language	English
Pages (from-to)	363-391
Number of pages	29
Journal	Accounting and Finance
Volume	56
Issue number	2
DOIs	https://doi.org/10.1111/acfi.12101
State	Published - Jun 1 2016
Externally published	Yes

Keywords

Analyst forecast revision
Forecast inconsistency
Forecast informativeness

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10.1111/acfi.12101

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title = "Why do analysts issue forecast revisions inconsistent with prior stock returns? Determinants and consequences",

abstract = "We examine the informativeness of analyst forecast revisions that are directionally inconsistent with prior stock price movements (sign-inconsistent revisions). Sign-inconsistent revisions represent approximately one-half of the forecast revisions from 1995 through 2010. Our tests indicate that sign-inconsistent revisions are less informative than are sign-consistent revisions. Sign-inconsistent revisions are less likely to be closer to actual earnings realizations and they generate smaller stock price reactions. We also find evidence that sign-inconsistent revisions are associated with analysts' economic incentives to generate trading volume and their behavioural limitations related to information uncertainty. These results suggest that sign-inconsistent revisions do not necessarily benefit investors.",

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N2 - We examine the informativeness of analyst forecast revisions that are directionally inconsistent with prior stock price movements (sign-inconsistent revisions). Sign-inconsistent revisions represent approximately one-half of the forecast revisions from 1995 through 2010. Our tests indicate that sign-inconsistent revisions are less informative than are sign-consistent revisions. Sign-inconsistent revisions are less likely to be closer to actual earnings realizations and they generate smaller stock price reactions. We also find evidence that sign-inconsistent revisions are associated with analysts' economic incentives to generate trading volume and their behavioural limitations related to information uncertainty. These results suggest that sign-inconsistent revisions do not necessarily benefit investors.

AB - We examine the informativeness of analyst forecast revisions that are directionally inconsistent with prior stock price movements (sign-inconsistent revisions). Sign-inconsistent revisions represent approximately one-half of the forecast revisions from 1995 through 2010. Our tests indicate that sign-inconsistent revisions are less informative than are sign-consistent revisions. Sign-inconsistent revisions are less likely to be closer to actual earnings realizations and they generate smaller stock price reactions. We also find evidence that sign-inconsistent revisions are associated with analysts' economic incentives to generate trading volume and their behavioural limitations related to information uncertainty. These results suggest that sign-inconsistent revisions do not necessarily benefit investors.

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Why do analysts issue forecast revisions inconsistent with prior stock returns? Determinants and consequences

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Keywords

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