Inflation, Earnings Forecasts, and Post-Earnings Announcement Drift

54 Pages Posted: 15 Feb 2005 Last revised: 22 May 2014

See all articles by Sudipta Basu

Sudipta Basu

Temple University - Department of Accounting

Stanimir Markov

University of Texas at Dallas - Naveen Jindal School of Management

Lakshmanan Shivakumar

London Business School

Date Written: September 8, 2009

Abstract

We examine whether financial analysts fully incorporate expected inflation in their earnings forecasts for individual stocks. We find that expected inflation proxies, such as lagged inflation and inflation forecasts from the Michigan Survey of Consumers, predict the future earnings change of a portfolio long in high inflation exposure firms and short in low or negative inflation exposure firms, but analysts do not fully adjust for this relation. Analysts’ earnings forecast errors can be predicted using expected inflation proxies, and these systematic forecast errors are related to future stock returns. Overall, our evidence is consistent with the Chordia and Shivakumar (2005) hypothesis that the post-earnings announcement drift is related to investor underestimation of the impact of expected inflation on future earnings change.

Keywords: inflation illusion, analysts, earnings forecasts

JEL Classification: G14, G29, M41

Suggested Citation

Basu, Sudipta and Markov, Stanimir and Shivakumar, Lakshmanan, Inflation, Earnings Forecasts, and Post-Earnings Announcement Drift (September 8, 2009). Review of Accounting Studies, Vol. 15, No. 2, 2010. Available at SSRN: https://ssrn.com/abstract=667322

Sudipta Basu (Contact Author)

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
215.204.0489 (Phone)
215.204.5587 (Fax)

Stanimir Markov

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States
972 883 5166 (Phone)

Lakshmanan Shivakumar

London Business School ( email )

Regent's Park
London, NW1 4SA
United Kingdom
+44 20 7000 8115 (Phone)
+44 20 7000 8101 (Fax)

HOME PAGE: http://faculty.london.edu/lshivakumar/

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