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Analyst Underreaction in the United Kingdom
Constantina Constantinou Philips College - Department of Accounting and Finance William Forbes Loughborough University - Business School Len Skerratt Brunel University - Economics and Finance; Philips College; Kingston University - Kingston Business School Financial Management, Vol. 32, No. 2, Summer 2003 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. Accepted Paper Series Date posted: June 04, 2003 ; Last revised: May 14, 2009Suggested CitationContact Information
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