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'Consistent' Earnings Surprises

52 Pages Posted: 15 Mar 2010 Last revised: 9 Sep 2014

Byoung-Hyoun Hwang

Cornell University - Dyson School of Applied Economics and Management; Korea University - Department of Finance

Baixiao Liu

Florida State University

Dong Lou

London School of Economics & Political Science (LSE)

Multiple version iconThere are 2 versions of this paper

Date Written: August 2014

Abstract

We hypothesize that analysts with a bullish stock recommendation have an interest in not being subsequently contradicted by negative firm-specific news. As a result, these analysts report downward-biased earnings forecasts so that the company is less likely to experience a negative earnings surprise. Analogously, analysts with a bearish recommendation report upward biased earnings forecasts so that the firm is less likely to experience a strong positive earnings surprise. Consistent with this notion, we find that stock recommendations significantly and positively predict subsequent earnings surprises, as well as narrow beats versus narrow misses. Stock recommendations also predict earnings-announcement-day returns. A long-short portfolio that exploits this predictability earns abnormal returns of 125 basis points per month.

Keywords: Stock recommendations, Biased earnings forecasts, Career concerns

JEL Classification: G14, G18, G20

Suggested Citation

Hwang, Byoung-Hyoun and Liu, Baixiao and Lou, Dong, 'Consistent' Earnings Surprises (August 2014). Available at SSRN: https://ssrn.com/abstract=1571619 or http://dx.doi.org/10.2139/ssrn.1571619

Byoung-Hyoun Hwang (Contact Author)

Cornell University - Dyson School of Applied Economics and Management ( email )

Ithaca, NY
United States

HOME PAGE: http://www.bhwang.com

Korea University - Department of Finance

Seoul, 136-701
United States

Baixiao Liu

Florida State University ( email )

Tallahasse, FL 32306
United States

Dong Lou

London School of Economics & Political Science (LSE) ( email )

Department of Finance
Houghton Street
London, WC2A 2AE
United Kingdom
+44 (0)207 1075360 (Phone)

HOME PAGE: http://personal.lse.ac.uk/loud/

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