The Effect of Analyst Forecasts During Earnings Announcements on Investor Responses to Reported Earnings

The Accounting Review Volume 92, Issue 3, pp. 239–263, 2017

59 Pages Posted: 31 May 2014 Last revised: 3 Mar 2021

See all articles by Gerald J. Lobo

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Minsup Song

Sogang University

Mary Harris Stanford

Texas Christian University - Department of Accounting

Date Written: March 10, 2015

Abstract

Despite the increased frequency of analyst forecasts during earnings announcements, empirical evidence on the interaction between the information in the earnings announcement and these forecasts is limited. We examine the implications of reinforcing and contradicting analyst forecast revisions issued during earnings announcements (days 0 and 1) on the market response to unexpected earnings. We classify forecast revisions as reinforcing (contradicting) when the sign of analyst forecast revisions agrees (disagrees) with the sign of unexpected earnings. We document larger (smaller) earnings response coefficients for announcements accompanied by reinforcing (contradicting) analyst forecast revisions. Analyses of management forecasts suggest that analyst revisions and management forecasts convey complementary information. Cross-sectional tests show that investors react more to earnings announcements accompanied by analyst forecast revisions when there is greater consensus among analysts (lower dispersion) and that better earnings quality (higher persistence) mitigates the negative impact of contradictory analyst forecast revisions.

Keywords: earnings response coefficient; reinforcing analyst forecast revisions; contradicting analyst forecast revisions; piggyback hypothesis

JEL Classification: D82, G29, M41

Suggested Citation

Lobo, Gerald J. and Song, Minsup and Stanford, Mary, The Effect of Analyst Forecasts During Earnings Announcements on Investor Responses to Reported Earnings (March 10, 2015). The Accounting Review Volume 92, Issue 3, pp. 239–263, 2017, Available at SSRN: https://ssrn.com/abstract=2443623 or http://dx.doi.org/10.2139/ssrn.2443623

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4838 (Phone)
713-743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/acct/acctprofile.asp?search=Gerald%20Lobo

Minsup Song (Contact Author)

Sogang University ( email )

Palaus Hall 802, Sogang Business School
1 Shinsoo-Dong, Mapo-Gu
Seoul
Korea, Republic of (South Korea)
82-2-705-8855 (Phone)

Mary Stanford

Texas Christian University - Department of Accounting ( email )

M.J. Neeley School of Business
TCU Box 298530
Fort Worth, TX 76129
United States
817-257-7483 (Phone)

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