Analysts’ and Investors’ Reactions to Consistent Earnings Signals
34 Pages Posted: 20 Jan 2016
Date Written: November/December 2015
We investigate (1) whether the trajectory of the current‐quarter earnings expectation path (defined by the signs of the forecast revision and the earnings surprise) provides information about future firm performance, and (2) the extent to which analysts and investors react to that information. Our results indicate that analysts underreact more to earnings information revealed by consistent‐signal earnings expectation paths than to earnings information communicated by inconsistent‐signal expectation paths. We also find that the current earnings expectation path provides incremental explanatory power for future abnormal returns, even after controlling for the sign and magnitude of the earnings surprise. Overall, our evidence is consistent with underreaction stemming from analysts’ and investors’ bias in processing the information in consistent‐signal earnings expectation paths.
Keywords: analysts, earnings expectation path, forecasts, trading strategies, representativeness bias, market efficiency
JEL Classification: G14, M40, M41
Suggested Citation: Suggested Citation