Using Analysts' Earnings Forecasts for Country/Industry-Based Asset Allocation

35 Pages Posted: 21 Jul 2004

See all articles by William Forbes

William Forbes

Loughborough University - Business School

Carel Huijgen

University of Groningen - Faculty of Economics and Business

Auke Plantinga

University of Groningen

Date Written: June 2004

Abstract

In this paper we investigate the usefulness of analysts' earnings forecast revisions in the allocation of funds to different industries and countries. In particular, we ask whether a post analyst revision announcement drift in prices can be exploited to guide an asset allocation strategy based on industry, or country, selection. Using monthly consensus I/B/E/S-First Call analysts' earnings forecasts for companies listed on the main European stock markets over the period January 1987 to December 2001, we find a significant post revision announcement effect for individual companies. However, the abnormal returns evaporate away as we move from an individual company level to an industry or country level. We provide two kinds of evidence which seem to cast doubt on the analysts' ability to fully incorporate industry and country specific information into their forecasts. First, we show that returns are driven more by common components than earnings forecast revisions. Second, we find that company specific news reflected by the revision signal dominates industry or country news.

Keywords: Earnings forecasts, asset allocation

JEL Classification: G11, G15, G29, M41

Suggested Citation

Forbes, William Patrick and Huijgen, Carel A. and Plantinga, Auke, Using Analysts' Earnings Forecasts for Country/Industry-Based Asset Allocation (June 2004). Available at SSRN: https://ssrn.com/abstract=567121 or http://dx.doi.org/10.2139/ssrn.567121

William Patrick Forbes

Loughborough University - Business School ( email )

Ashby Road
Loughborough
Nottingham NG1 4BU, LE11 3TU
Great Britain

Carel A. Huijgen (Contact Author)

University of Groningen - Faculty of Economics and Business ( email )

Postbus 72
9700 AB Groningen
Netherlands
+3150 363 7206 (Phone)

Auke Plantinga

University of Groningen ( email )

P.O. Box 800
9700 AH Groningen
Netherlands
+31 50 363 3685 (Phone)

HOME PAGE: http://www.aukeplantinga.com

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