Analysts’ and Investors’ Reactions to Consistent Earnings Signals

34 Pages Posted: 20 Jan 2016

See all articles by Marcus L. Caylor

Marcus L. Caylor

Kennesaw State University

Theodore E. Christensen

University of Georgia - J.M. Tull School of Accounting; University of Georgia

Peter M. Johnson

Brigham Young University - School of Accountancy

Thomas J. Lopez

University of Alabama - Culverhouse School of Accountancy

Date Written: November/December 2015

Abstract

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

Caylor, Marcus L. and Christensen, Theodore E. and Johnson, Peter M. and Lopez, Thomas J., Analysts’ and Investors’ Reactions to Consistent Earnings Signals (November/December 2015). Journal of Business Finance & Accounting, Vol. 42, Issue 9-10, pp. 1041-1074, 2015. Available at SSRN: https://ssrn.com/abstract=2718651 or http://dx.doi.org/10.1111/jbfa.12163

Marcus L. Caylor (Contact Author)

Kennesaw State University ( email )

1000 Chastain Road
Kennesaw, GA 30144
United States

Theodore E. Christensen

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States

University of Georgia ( email )

Athens, GA
United States

Peter M. Johnson

Brigham Young University - School of Accountancy ( email )

Provo, UT 84602
United States

Thomas J. Lopez

University of Alabama - Culverhouse School of Accountancy ( email )

Culverhouse College of Business
Tuscaloosa, AL 35487-0223
United States
205-348-2907 (Phone)

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