Do Analysts Treat Winners and Losers Differently When Forecasting Earnings?

Posted: 28 Jul 2015

See all articles by Jay Jung

Jay Jung

City, University of London - Cass Business School

Jinhan Pae

Korea University Business School (KUBS)

Choong-Yuel Yoo

KAIST College of Business

Date Written: June 27, 2014

Abstract

We investigate whether the well-known positive association between past stock returns and analysts’ earnings forecast revisions differs for stocks that have experienced extreme positive (or negative) price changes. We document an asymmetry in this association depending on whether a stock experienced consecutive rounds of capital gains (winner) or losses (loser): the association is strong for losers, but weak for winners. We also find that earnings forecasts are less accurate for analysts who treat winners and losers differently from moderately-performing stocks. However, the degree of such aberrant reactions to winners and losers and the consequent detrimental effect on the forecasting accuracy are less acute for analysts who have more forecasting experience with winners and losers. Finally, consistent with the efficient market hypothesis (EMH), we find that investors discount earnings forecast revisions by analysts who treat winners and losers differently, particularly after 2003, coinciding with the Global Settlement that aims to improve the integrity of analyst research and investors’ financial literacy.

Keywords: asymmetry, earnings forecast revisions, stock returns, the Global Settlement

JEL Classification: G02, G38, M41

Suggested Citation

Jung, Jay Heon and Pae, Jinhan and Yoo, Choong-Yuel, Do Analysts Treat Winners and Losers Differently When Forecasting Earnings? (June 27, 2014). International Journal of Forecasting, Vol. 31, No. 2, 2015. Available at SSRN: https://ssrn.com/abstract=2636814

Jay Heon Jung (Contact Author)

City, University of London - Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

HOME PAGE: http://www.jayheonjung.com

Jinhan Pae

Korea University Business School (KUBS) ( email )

Anam-Dong, Seongbuk-Gu
Seoul 136-701, 136701
Korea

Choong-Yuel Yoo

KAIST College of Business ( email )

85 Hoegiro, Dongdaemoon-gu
Seoul, 02455
Korea, Republic of (South Korea)

HOME PAGE: http://www.business.kaist.edu/faculty/cyoo

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