No abstract

a b s t r a c tWe first examine whether analysts with certain characteristics that prior research has identified are related to superior forecasting ability systematically time their forecast revisions later in the fiscal quarter. We then examine whether this superior ability persists after controlling for the timing advantage by using relative forecast error, a measure that largely eliminates the timing advantage of recent forecasts. Using a sample of quarterly earnings forecast revisions over the 20-year period from 1990 to 2009, we find that analysts with more firm-specific and general experience and more accurate prior-period forecasts, analysts employed by larger brokerage firms, and analysts who follow fewer industries and companies tend to revise forecasts later in the quarter. We also find that analyst characteristics that are positively correlated with revision timing are negatively related to relative forecast errors. These results are consistent with analyst characteristics being useful proxies for analyst forecasting ability and analysts with greater ability revising forecasts later in the quarter.

This study examines the stock-price reactions to analyst forecast revisions around earnings announcements to test whether pre-announcement forecasts reflect analysts' private information or piggybacking on confounding events and news. We find that management earnings forecasts influence the timing and precision of analyst forecasts. More importantly, evidence suggests that prior studies' finding of weaker (stronger) stock-price responses to forecast revisions in the period immediately after (before) the prior-quarter earnings announcement disappears once management earnings forecasts are controlled for. To the extent that management earnings forecasts are public disclosures, our results suggest that the importance of analysts' information discovery role documented in prior studies is likely to be overstated.

Despite the increased frequency of analyst forecasts during earnings announcements, empirical evidence on the interaction between the information in the earnings announcement and these forecasts is limited. We examine the implications of reinforcing and contradicting analyst forecast revisions issued during earnings announcements (days 0 and +1) on the market response to unexpected earnings. We classify forecast revisions as reinforcing (contradicting) when the sign of analyst forecast revisions agrees (disagrees) with the sign of unexpected earnings. We document larger (smaller) earnings response coefficients for announcements accompanied by reinforcing (contradicting) analyst forecast revisions. Analyses of management forecasts suggest that analyst revisions and management forecasts convey complementary information. Cross-sectional tests show that investors react more to earnings announcements accompanied by analyst forecast revisions when there is greater consensus among analysts (lower dispersion) and that better earnings quality (higher persistence) mitigates the negative impact of contradictory analyst forecast revisions. JEL Classifications: D82; G29; M41.

This study empirically investigates how a firm's earnings uncertainty affects analysts' herding behaviors in earnings forecasts. Trueman (1994) and Graham (1999) analytically predict that analysts have higher incentives to issue a herding forecast when a firm's earnings uncertainty is low. We test this analytical prediction using a proxy for bold forecasts used by Gleason and Lee (2003) and Clement and Tse (2005). We classify analysts' earnings forecasts as bold when an analyst's revised forecast is larger (or smaller) than both the analyst's own prior forecast and the mean consensus forecast of other analysts immediately prior to the analyst's forecast. Earnings uncertainty is measured by standard deviation of time‐serial earnings forecast errors. A logit regression result shows a positive relation between bold forecasts and earnings uncertainty after controlling for analyst characteristics, which is consistent with the prediction by Trueman (1994) and Graham (1999). We also find that as earnings uncertainty increases, the accuracy of analysts' bold forecasts relative to consensus forecast accuracy also increases. These results imply that analysts are active in producing new relevant information about firms when earnings uncertainty is higher.