Analysts’ Forecast Consistency and Investor Responsiveness to Earnings Information
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This study investigates how analysts’ forecast consistency is associated with investor responsiveness to earnings information. Hilary and Hsu (2013) reported that forecasts issued by analysts with more consistency of earnings forecast are more informative. Thus, we expect that analyst forecast with consistent error (i.e. error with low standard deviation) contributes to mitigating the investors’ under-reaction to earnings information. Consistent forecast errors, meanwhile, may lead to investors’ under-reaction to unexpected earnings. If investors fail to unravel the information in earnings persistence regarding future earnings change, forecast consistency may intensify investors’ under-reaction to earnings information, resulting into a more delayed stock price reaction. Thus, the effect of forecast consistency on the investors’ response to earnings information is an empirical question. Using 2005-2015 firms listed on Korean Stock Exchange, empirical result shows that analysts’ forecast consistency has positive relation to abnormal returns subsequent to earnings announcement date. Given that abnormal returns following earnings announcement date are due to investors’ under-reaction to earnings information, it appears analysts’ forecast consistency makes such a under-reaction to information stronger. Moreover, this result holds even after controlling for analysts forecast accuracy and addressing cross-sectional correlation between analysts. This means that investors do not fully understand the implication of consistent biases in analysts’ forecasts and consequently under-react to the information for future earnings. By showing the significant impact of analysts’ forecast consistency on a delayed stock price reaction, this study suggests analysts’ forecast consistency as a critical determinant of investor response to earnings information in stock market.
Abstract
This study investigates how analysts’ forecast consistency is associated with investor responsiveness to earnings information. Hilary and Hsu (2013) reported that forecasts issued by analysts with more consistency of earnings forecast are more informative. Thus, we expect that analyst forecast with consistent error (i.e. error with low standard deviation) contributes to mitigating the investors’ under-reaction to earnings information. Consistent forecast errors, meanwhile, may lead to investors’ under-reaction to unexpected earnings. If investors fail to unravel the information in earnings persistence regarding future earnings change, forecast consistency may intensify investors’ under-reaction to earnings information, resulting into a more delayed stock price reaction. Thus, the effect of forecast consistency on the investors’ response to earnings information is an empirical question. Using 2005-2015 firms listed on Korean Stock Exchange, empirical result shows that analysts’ forecast consistency has positive relation to abnormal returns subsequent to earnings announcement date. Given that abnormal returns following earnings announcement date are due to investors’ under-reaction to earnings information, it appears analysts’ forecast consistency makes such a under-reaction to information stronger. Moreover, this result holds even after controlling for analysts forecast accuracy and addressing cross-sectional correlation between analysts. This means that investors do not fully understand the implication of consistent biases in analysts’ forecasts and consequently under-react to the information for future earnings. By showing the significant impact of analysts’ forecast consistency on a delayed stock price reaction, this study suggests analysts’ forecast consistency as a critical determinant of investor response to earnings information in stock market.
참고문헌 (37)
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