Large Price Changes and Subsequent Returns

Abstract:     
We investigate whether large stock price changes are associated with short-term reversals or momentum, conditional on the issuance of analyst price target or earnings forecast revisions immediately following these price changes. Our study provides evidence that when analyst revisions occur immediately after large price shocks, stock prices exhibit momentum, suggesting the initial price change was based on new information. In contrast, when price changes are not followed by immediate analyst revisions, we document short-term reversals, indicating that the initial price shocks were probably caused by liquidity or noise traders. A trading strategy that is based on the direction of the price change and the existence of immediate analyst revisions in the same direction earns significant abnormal monthly calendar-time returns.

Number of Pages in PDF File: 41

Keywords: Large Price Changes, Analysts’ Earnings Forecasts Revisions, Analysts’ Target Price Revisions

JEL Classification: G11, G12, C14, M41

working papers series