'Other Information' as an Explanatory Factor for the Market Reactions to Firms' Meeting or Beating Analyst Forecasts
39 Pages Posted: 12 Sep 2008
Date Written: September 11, 2008
Although the extant literature finds that analyst forecasts are one of the most critical thresholds for setting market's expectations, we find that the market reacts negatively to 41-percent of firms that meet or beat analyst forecasts and positively to 43-percent of firms that miss analyst forecasts. Kothari (2001) argues that seemingly counterintuitive market reactions, like these, are attributable to (1) the market reacting to information not captured in the accounting process; and, (2) the transitory nature of earnings. The extant literature provides ample evidence of the latter, suggesting that counterintuitive reactions are often attributable to the transitory components of earnings. We find evidence supporting this claim as well, but we find that the market also reacts to 'other information', and these reactions are incremental to the reactions attributable to transitory earnings. Further tests reveal that these reactions to 'other information' may be attributable to commonly identified factors in the literature, such as long-run growth, market risk, analysts' forecast precision, price decreases from the prior quarter and firm size, but we find evidence that these reactions are also attributable to information contained in analyst forecasts beyond these factors. Our findings suggest, however, that these counterintuitive market reactions are, in part, attributable to the market overestimating the persistence of 'other information'.
Keywords: MBE, market mispricing, other information, transitory earnings
JEL Classification: G29, G14, D82, M41
Suggested Citation: Suggested Citation