Analyst Underreaction and the Post-Forecast Revision Drift

Abstract

We find that analysts exhibit an underreaction bias when revising their forecasts and that the post-forecast revision drift (PFRD) manifests because investors appear to fixate on the biased forecast revision numbers. We further confirm the association between the bias and the PFRD by demonstrating similar patterns of cross-sectional and time-series variation in both analyst underreaction and the PFRD. In contrast to the extant literature attributing the PFRD to investors’ underreaction to analyst forecast revisions, our findings suggest that the PFRD arises from the combined effect of analyst underreaction in the forecast revision process and investor fixation on the revision numbers.

Keywords: Analyst underreaction, post-forecast revision drift

JEL Classification: G11, G14, G24