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 journalArticlepeer-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 languageEnglish
Pages (from-to)363-391
Number of pages29
JournalAccounting and Finance
Volume56
Issue number2
DOIs
StatePublished - Jun 1 2016
Externally publishedYes

Keywords

  • Analyst forecast revision
  • Forecast inconsistency
  • Forecast informativeness

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