Why do analysts issue forecast revisions inconsistent with prior stock returns? Determinants and consequences

Xiaobo Dong, Kuan-Chen Lin, Roger Graham and Anne Wyatt

Accounting and Finance, 2016, vol. 56, issue 2, 363-391

Abstract: type="main" xml:id="acfi12101-abs-0001">

We examine the informativeness of analyst forecast revisions that are directionally inconsistent with prior stock price movements (sign-inconsistent revisions). Sign-inconsistent revisions represent approximately one-half of the forecast revisions from 1995 through 2010. Our tests indicate that sign-inconsistent revisions are less informative than are sign-consistent revisions. Sign-inconsistent revisions are less likely to be closer to actual earnings realizations and they generate smaller stock price reactions. We also find evidence that sign-inconsistent revisions are associated with analysts' economic incentives to generate trading volume and their behavioural limitations related to information uncertainty. These results suggest that sign-inconsistent revisions do not necessarily benefit investors.

Date: 2016
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