Large Price Changes and Subsequent Returns
Journal of Investment Management (JOIM), Third Quarter 2014
Posted: 16 Nov 2014
Date Written: October 15, 2014
We investigate whether large stock price changes are associated with short-term reversals or momentum, conditional on the issuance of analyst price target or earnings forecast revisions immediately following these price changes. Our study provides evidence that prices of stocks exhibit momentum when analysts issue revisions after large price shocks, and suggests that the initial price changes were indeed based on new information. In contrast, when price changes are not followed by immediate analyst revisions, we document short-term reversals, indicating that the initial price shocks were likely caused by liquidity or noise traders. A trading strategy that is based on the direction of the price change and the existence of analyst revisions in the same direction earns significant abnormal monthly returns (over 1%).
Keywords: Large price changes, analyst revisions, earnings forecasts, target price, abnormal returns, momentum, reversals
JEL Classification: G00
Suggested Citation: Suggested Citation