Fundamental Analysis Future Earnings, and Stock Prices

Posted: 8 Jul 1998

See all articles by Jeffery S. Abarbanell

Jeffery S. Abarbanell

University of North Carolina (UNC) at Chapel Hill - Finance Area

Brian J. Bushee

University of Pennsylvania - The Wharton School

Multiple version iconThere are 2 versions of this paper

Abstract

This paper studies the information links that connect detailed financial statement data and security prices. We establish empirically the underlying relations between rules of fundamental analysis and: 1) analysts' earnings forecast revisions, 2) actual future earnings changes and 3) security returns. We find evidence that some but not all of the fundamental signals are related to subsequent earnings changes and analysts' revisions as hypothesized. Paradoxically, contemporaneous security returns reveal that, in the eyes of investors, the set of fundamental signals contain information orthogonal to analysts' revisions. Additional evidence suggests one explanation for this result is that analysts' forecast revisions are inefficient with respect to the future earnings information contained in some of the fundamental signals. One practical implication of our findings is that if analysts were to process efficiently the information in the fundamental signals, it would be sufficient to eliminate the well-documented phenomenon of analyst underreaction to prior earnings news.

JEL Classification: G14, M41

Suggested Citation

Abarbanell, Jeffery S. and Bushee, Brian J., Fundamental Analysis Future Earnings, and Stock Prices. Available at SSRN: https://ssrn.com/abstract=105748

Jeffery S. Abarbanell (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Brian J. Bushee

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-4872 (Phone)
215-573-2054 (Fax)

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