Underreaction to Industry-Wide Earnings and the Post-Forecast Revision Drift

48 Pages Posted: 16 Jan 2011 Last revised: 11 Jul 2012

See all articles by Kai Wai Hui

Kai Wai Hui

The University of Hong Kong (HKU) - Department of Accounting

P. Eric Yeung

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: July 1, 2012

Abstract

We test whether the post-forecast revision drift is mainly attributable to investors’ underreaction to industry-wide earnings news conveyed by analysts’ forecast revisions. We find a large drift associated with industry-wide earnings news but no drift associated with firm-specific earnings news. Consistent with the functional fixation hypothesis, we provide evidence that the post-forecast revision drift is driven by investors’ underreaction to the higher persistence of industry-wide earnings. While prior research has focused on differential persistence of earnings components stemming from managerial reporting discretion, we provide evidence suggesting that investors do not fully understand the differential earnings persistence attributable to industry fundamentals.

Keywords: Post Forecast Revision Drift, Underreaction, Industry-Wide Earnings, Firm-Specific Earnings

JEL Classification: G14, M41

Suggested Citation

Hui, Kai Wai and Yeung, P. Eric, Underreaction to Industry-Wide Earnings and the Post-Forecast Revision Drift (July 1, 2012). Available at SSRN: https://ssrn.com/abstract=1741203 or http://dx.doi.org/10.2139/ssrn.1741203

Kai Wai Hui

The University of Hong Kong (HKU) - Department of Accounting ( email )

Pokfulam Road
Hong Kong, Pokfulam
Hong Kong

P. Eric Yeung (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

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