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Constantina Constantinou
Philips College - Department of Accounting and Finance William Forbes
Loughborough University - Business School Len Skerratt
Brunel University - Economics and Finance
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04 Jun 03
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Last Revised:
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14 May 09
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Abstract:
We revisit the debate on the interpretation given to prior-year earnings changes in predicting analysts' future forecast errors. We advance a new specification of this relation that distinguishes between earnings reversion and momentum. For a large UK dataset for the years 1990-1996, we find substantial underreaction, particularly in situations of earnings momentum. We find that underreaction is further increased for cases of downward earnings momentum when the analyst's merchant bank acts as a broker to the company. We interpret this as a reporting bias caused by an analyst's response to bad news being compromised.
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