Inflation, Earnings Forecasts, and Post-Earnings Announcement Drift
54 Pages Posted: 15 Feb 2005 Last revised: 22 May 2014
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: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Paper statistics
Recommended Papers
-
Liquidity and the Post-Earnings-Announcement Drift
By Tarun Chordia, Ronnie Sadka, ...
-
Liquidity and the Post-Earnings-Announcement Drift
By Tarun Chordia, Amit Goyal, ...
-
The Extreme Future Stock Returns Following Extreme Earnings Surprises
By Jeffrey T. Doyle, Russell J. Lundholm, ...
-
By Lawrence D. Brown and Jerry C. Y. Han
-
Information Uncertainty and Post-Earnings-Announcement-Drift
By Jennifer Francis, Ryan Lafond, ...
-
Volume, Opinion Divergence and Returns: A Study of Post-Earnings Announcement Drift