Meeting Analyst Forecasts and Stock Returns

Abstract

Firms whose quarterly earning announcements closely meet the most recent analyst consensus forecast enjoy higher long-lasting future returns. These firms tend to be larger and are followed by more analysts, whose forecasts have a smaller dispersion. While the proportion of past quarters when forecasts are met is positively related to future returns, the proportion of past quarters when forecasts are strictly beaten is negatively related to future returns. Return differentials based on past earning surprises are not easily explained by standard risk factors. A model in which investors ignore fundamentals as long as news are good shows that firms who anticipate investors' reaction to earnings performance might have incentives to manage their earnings in order to avoid negative surprises, and that closely matching the forecasts might help them with this objective. Firms managing earnings might perform better in the long run despite their medium term objective.

Keywords: analyst forecasts, earnings announcements, earnings management, market performance, momentum

JEL Classification: D21, G12, G17