Analyst Forecasts and Stock Returns

34 Pages Posted: 6 Jun 2001

See all articles by James S. Ang

James S. Ang

Florida State University; Florida State University - College of Law

Stephen John Ciccone

University of New Hampshire - Department of Accounting & Finance

Date Written: May 2001

Abstract

This study seeks to determine the relation between stock returns and analyst forecast properties, specifically, the dispersion and error of annual earnings forecasts. The results of portfolio sorts, Fama-MacBeth cross-sectional regression models, and Fama and French (1993) factor models indicate firms with low dispersion or error outperform firms with high dispersion or error. Robustness tests show the results are not explained by liquidity, momentum, industry, post-earnings announcement drift, or traditional risk measures. An investment strategy based on forecast properties is shown to produce zero-cost returns of 13% per year, yielding positive returns in all 19 years using an error measure. The results are not attributable to several potential theories. Risk-related theories are eliminated as firms with low dispersion or error ("transparent") outperform firms with high dispersion or error ("opaque"). This remains true even after controlling for volatility measures. Behavioral theories based on optimism are also eliminated as optimistic forecasts only explain a small part of the results. Finally, the results are not related to contrarian-value strategies as the transparent firms outperform in both up and down markets.

Keywords: Analysts, Analyst forecasts, Earnings forecasts, Stock returns, Information asymmetry, Return factors, Asset pricing models

JEL Classification: G12, G14, G29, M41

Suggested Citation

Ang, James S. and Ciccone, Stephen J., Analyst Forecasts and Stock Returns (May 2001). Available at SSRN: https://ssrn.com/abstract=271713 or http://dx.doi.org/10.2139/ssrn.271713

James S. Ang

Florida State University ( email )

College of Business
Tallahassee, FL 32306-1042
United States
904-644-8208 (Phone)

Florida State University - College of Law ( email )

425 W. Jefferson Street
Tallahassee, FL 32306
United States

Stephen J. Ciccone (Contact Author)

University of New Hampshire - Department of Accounting & Finance ( email )

Durham, NH 03824
United States
603-862-3343 (Phone)
603-862-3383 (Fax)

HOME PAGE: http://pubpages.unh.edu/~sciccone

Register to save articles to
your library

Register

Paper statistics

Downloads
2,697
rank
4,255
Abstract Views
10,437
PlumX Metrics