Returns to Buying Upward Revision and Selling Downward Revision: Some Preliminary Evidence from Canada

Managerial Finance, Vol. 42 Iss 11 pp.1110 - 1124.

35 Pages Posted: 2 Aug 2016 Last revised: 21 Dec 2016

See all articles by Tony Chieh-tse Hou

Tony Chieh-tse Hou

National Dong Hwa University

Phillip J. McKnight

University of Wisconsin - Milwaukee

Charlie Weir

Robert Gordon University - Aberdeen Business School

Date Written: May 1, 2016

Abstract

The purpose of this paper is to investigate the role of earnings forecast revisions by equity analysts in predicting Canadian stock returns. The sample covers 420 Canadian firms over the period 1998-2009. It analyses investors’ reactions to 27,271 upward revisions and 32,005 downward revisions of analysts’ forecasts for Canadian quoted companies. To test whether analysts’ earnings forecast revisions affect stock return continuation, forecast revision portfolios similar to Jegadeesh and Titman (2001) are constructed. The paper analyses the returns gained from a trading strategy based on buying the strong upward revisions portfolio and short selling the strong downward revisions portfolio. It also separates the sample into upward and downward revisions. We find that new information in the form of analyst forecast revisions is not impounded efficiently into stock prices. Significant returns persist for a trading strategy that buys stocks with recent upward revisions and short sells stocks with recent downward revisions. Good news is impounded into stock prices more slowly than bad news. Post-earnings forecast revisions drift is negatively related to analyst coverage. The effect is strongest for stocks with greatest number of upward revisions. The introduction of the better disclosure standards has made the Canadian stock market more efficient. The paper adds to the limited evidence on the effect of analyst forecast revisions on the returns of Canadian stocks. It sheds light on the importance of analysts’ earnings forecast information and offers support for the investor conservatism and information diffusion hypotheses. It also shows how policy can improve market efficiency.

Keywords: Analyst Forecast Revisions; Stock Returns; Under-Reaction; Investor Behavior

JEL Classification: G10, G14

Suggested Citation

Hou, Tony Chieh-tse and McKnight, Phillip J. and Weir, Charles, Returns to Buying Upward Revision and Selling Downward Revision: Some Preliminary Evidence from Canada (May 1, 2016). Managerial Finance, Vol. 42 Iss 11 pp.1110 - 1124. . Available at SSRN: https://ssrn.com/abstract=2816472

Tony Chieh-tse Hou (Contact Author)

National Dong Hwa University ( email )

No. 1, Sec. 2, Da Hsueh Rd.
Shoufeng
Hualien, 97401
Taiwan

HOME PAGE: http://faculty.ndhu.edu.tw/~tonycthou/

Phillip J. McKnight

University of Wisconsin - Milwaukee ( email )

Milwaukee, WI
United States

Charles Weir

Robert Gordon University - Aberdeen Business School ( email )

Garthdee Road
RGU
Aberdeen AB10 7QE
United Kingdom
0044 1224 263800 (Phone)
0044 1224 263838 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
70
Abstract Views
449
rank
329,185
PlumX Metrics