Analyst Underreaction and the Post-Forecast Revision Drift

Forthcoming in Journal of Business Finance and Accounting

54 Pages Posted: 16 Mar 2015 Last revised: 13 Aug 2020

See all articles by Po-Chang Chen

Po-Chang Chen

Miami University of Ohio - Richard T. Farmer School of Business Administration

Ganapathi S. Narayanamoorthy

Tulane University - Accounting & Taxation

Theodore Sougiannis

University of Illinois at Urbana-Champaign - Department of Accountancy

Hui Zhou

University of Auckland

Date Written: August 3, 2020

Abstract

The post-forecast revision drift (PFRD), the phenomenon of delayed stock price reactions to analyst forecast revisions, is a well-documented market anomaly. Prior research attributes PFRD to underreaction by investors to analyst forecast revisions. This study investigates the role of the analyst forecast revision process itself in the PFRD anomaly. Using a large sample of U.S. firms, we confirm prior findings of a positive serial correlation (momentum) in individual analysts’ revisions to their earnings forecasts and, based on both indirect and direct tests, document a positive association between this momentum and PFRD. Further analyses reveal that both the forecast revision momentum and PFRD vary in similar ways with respect to the nature of the news driving the revisions and the information environment. Collectively, our findings show that underreaction by individual analysts in the forecast revision process is an important contributor to the PFRD phenomenon.

Keywords: Analyst forecast revisions; Analyst underreaction; Revision Momentum; Post-Forecast Revision Drift; PFRD

JEL Classification: G14; G24; G29; M41

Suggested Citation

Chen, Po-Chang and Narayanamoorthy, Ganapathi S. and Sougiannis, Theodore and Zhou, Hui, Analyst Underreaction and the Post-Forecast Revision Drift (August 3, 2020). Forthcoming in Journal of Business Finance and Accounting, Available at SSRN: https://ssrn.com/abstract=2578757 or http://dx.doi.org/10.2139/ssrn.2578757

Po-Chang Chen (Contact Author)

Miami University of Ohio - Richard T. Farmer School of Business Administration ( email )

3086 Farmer School of Business
Oxford, OH 45056
United States

Ganapathi S. Narayanamoorthy

Tulane University - Accounting & Taxation ( email )

United States

Theodore Sougiannis

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

360 Wohlers Hall
1206 South Sixth Street
Champaign, IL 61820
United States
217-244-0555 (Phone)
217-244-0902 (Fax)

Hui Zhou

University of Auckland ( email )

Private Bag 92019
Auckland Mail Centre
Auckland, 1142
New Zealand

HOME PAGE: http://https://unidirectory.auckland.ac.nz/profile/hzho663

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