Analyst Forecast Revisions and Market Price Formation

Abstract

We document several factors that help explain cross-sectional variations in the delayed price response to individual analyst forecast revisions. First, the market does not make a sufficient distinction between those analysts providing new information and others simply "herding" toward the consensus. Second, the market responds more completely to "celebrity" analysts, and under-weights revisions by obscure, but highly accurate, analysts. Third, controlling for firm size, the market price adjustment is more complete for firms with wider analyst coverage. Moreover, a significant portion of the delayed price response is corrected around future earnings news events, particularly forecast revisions by other analysts. Taken together, these findings show that qualitative aspects of an earnings signal can affect the speed and efficacy of the price formation process.

Keywords: Analyst, earnings forecasts, estimates, revisions, momentum market efficiency, expected returns, investments

JEL Classification: G12, G14, G21, G24, G29, M41