Investor and (Value Line) Analyst Underreaction to Information About Future Earnings: The Corrective Role of Non-Earnings-Surprise Information

26 Pages Posted: 4 Jun 2001

See all articles by Peter A. Brous

Peter A. Brous

Seattle University

Philip B. Shane

College of William & Mary; Monash University; Monash University - Department of Accounting

Date Written: July 10, 2000

Abstract

Prior research suggests that financial analysts' earnings forecasts and stock prices underreact to earnings news. This paper provides evidence that analysts and investors correct this underreaction in response to the next earnings announcement and to other (non-earnings-surprise) information available between earnings announcements. Our evidence also suggests that analysts and investors underreact to information reflected in analysts' earnings forecast revisions and that non-earnings-surprise information helps correct this underreaction as well. Controlling for corrective non-earnings-surprise information significantly increases estimates of the degree to which analysts' forecasting behavior can explain drifts in returns following both earnings announcements and analysts' earnings forecast revisions.

Keywords: Analysts' forecasts, Market efficiency, Underreaction, Post-earnings-announcement drift

JEL Classification: M41, G12, G14, G29

Suggested Citation

Brous, Peter A. and Shane, Philip B., Investor and (Value Line) Analyst Underreaction to Information About Future Earnings: The Corrective Role of Non-Earnings-Surprise Information (July 10, 2000). Available at SSRN: https://ssrn.com/abstract=271916 or http://dx.doi.org/10.2139/ssrn.271916

Peter A. Brous

Seattle University ( email )

Broadway and Madison
Department of Economics & Finance
Seattle, WA 98121-4460
United States
206-296-6495 (Phone)
206-296-2486 (Fax)

Philip B. Shane (Contact Author)

College of William & Mary ( email )

P.O. Box 8795
Williamsburg, VA 23185
United States

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Monash University - Department of Accounting ( email )

H3.43, Building H, Level 3
Monash University Caulfiled
Melbourne, VIC 3145
Australia

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