Analyst Underreaction in the United Kingdom

Constantina Ph. Constantinou, William P. Forbes and Len Skerratt

Financial Management, 2003, vol. 32, issue 2

Abstract: We revisit the debate on the interpretation given to prior-year earnings changes in predicting analysts’ future forecast errors. We advance a new specification of this relation that distinguishes between earnings reversion and momentum. For a large UK dataset for the years 1990-1996, we find substantial underreaction, particularly in situations of earnings momentum. We find that underreaction is further increased for cases of downward earnings momentum when the analyst’s merchant bank acts as a broker to the company. We interpret this as a reporting bias caused by an analyst’s response to bad news being compromised.

Date: 2003
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