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 signinconsistent 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.

Market response of US equities to domestic natural disasters: industry‐based evidence

“…Following many previous event studies (see, e.g., Fama, 2014; Coelho, 2015; Dong et al ., 2016), we use the Fama‐French three‐factor model as our benchmark to calculate abnormal returns and analyse the market impact of natural disasters at stock level 6. We use all trading days prior to the start of the disaster seasons (1 December to 31 May) announced by the state departments 7.…”

Using abnormal analyst coverage to unlock new evidence on stock price crash risk

“…Analysts' price targets and recommendations contradict investment signals generated from well-known anomalies(Dong et al, 2016;Engelberg et al, 2018), again emphasising that analysts do not necessarily improve market efficiency.© 2020 Accounting and Finance Association of Australia and New Zealand H. Chowdhury et al/Accounting & Finance 61 (2021) 1557-1588…”

Analyst bias and forecast consistency

“…First, prior research indicates that analysts herd and suggests that forecasts that are inconsistent with those of the analyst's peers are costly (Trueman, 1994;Hong et al, 2000;Clement and Tse, 2005;Jegadeesh and Kim, 2010). Second, Dong et al (2015) and Lobo et al (2017) examine analyst consistency relative to other information (stock returns and earnings announcements, respectively) and find evidence that inconsistent forecasts are less accurate and less informative to the market, supporting the concept that inconsistent forecasts are costly. A third body of literature focuses on an analyst's consistency with his/her own other outputs (Trueman, 1994;Raedy et al, 2006;Brown and Huang, 2013;Hilary and Hsu, 2013) and finds inconsistent forecasts to be costly in terms of accuracy, reputation and career concerns.…”