The role of analyst forecasts in the momentum effect

Rand Kwong Yew Low and Enoch Tan

International Review of Financial Analysis, 2016, vol. 48, issue C, 67-84

Abstract: We evaluate the extent to which sell-side equity analysts can facilitate market efficiency when there is increasing uncertainty about a stock's future value. The prevalence of the 52-week-high momentum anomaly, that can be largely attributed to information uncertainty, provides a setting for examining the value and timing of analysts' earnings forecast revisions. Our study finds that analysts can provide value-relevant signals to investors by picking up indicators of momentum. The ability to identify under or over-valued stocks suggests that analysts are important information intermediaries in the price-continuation momentum effect. However, we also observe pervasive asymmetric reaction to good and bad news throughout our study that is consistent with incentive-driven reporting and optimistic biases. Nevertheless, analysts' forecast revisions are informative at different stages to re-establish stock prices back to their fundamental valuation.

Keywords: Momentum; Analysts' forecast revision; Optimistic bias; Recency bias; 52-Week-high price (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:48:y:2016:i:c:p:67-84

DOI: 10.1016/j.irfa.2016.09.007

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