Why Do Analysts Issue Forecast Revisions Inconsistent with Prior Stock Returns? Determinants and Consequences

Accounting and Finance, Forthcoming

38 Pages Posted: 31 Oct 2014

See all articles by Xiaobo Dong

Xiaobo Dong

University of Houston at Victoria

Kuan-Chen Lin

Oregon State University

Roger C. Graham

Oregon State University

Date Written: October 29, 2014

Abstract

We examine the informativeness of analyst forecast revisions that are directionally inconsistent with prior stock price movements (sign-inconsistent revisions). Sign-inconsistent revisions represent approximately one-half of the forecast revisions from 1995 through 2010. Our tests indicate that sign-inconsistent revisions are less informative than are sign-consistent revisions. Sign-inconsistent revisions are less likely to be closer to actual earnings realizations and they generate smaller stock price reactions. We also find evidence that sign-inconsistent revisions are associated with analysts’ economic incentives to generate trading volume and their behavioral limitations related to information uncertainty. These results suggest that sign-inconsistent revisions do not necessarily benefit investors.

Keywords: Analyst forecast revision; Forecast inconsistency; Forecast informativeness

JEL Classification: G24

Suggested Citation

Dong, Xiaobo and Lin, Kuan-Chen and Graham, Roger C., Why Do Analysts Issue Forecast Revisions Inconsistent with Prior Stock Returns? Determinants and Consequences (October 29, 2014). Accounting and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2516544

Xiaobo Dong (Contact Author)

University of Houston at Victoria ( email )

14000 University Blvd.
Sugar Land, TX 77479
United States

Kuan-Chen Lin

Oregon State University ( email )

Bexell Hall 200
Corvallis, OR 97331
United States

Roger C. Graham

Oregon State University ( email )

424 Austen Hall
Corvallis, OR 97331
United States
541-737-4028 (Phone)
541-737-4890 (Fax)

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