Do Japanese Analysts Overreact or Underreact to Earnings Announcements?

Several recent studies have used U.S. analysts' forecasts to test for underreaction or overreaction to information in earnings announcements. These tests have provided mixed results. Evidence in Mendenhall (1991) is that analysts underreact. By contrast. results in De Bondt and Thaler (1990) show overreaction by U.S. financial analysts to earnings announcements. The current study contributes to this topic by examining over/underreaction by Japanese financial analysts. Test results show that Japanese analysts do not overreact to earnings announcements, market to book ratios and sales growth. Instead. there is strong evidence that Japanese analysts underreact to earnings announcements and that their underreaction is more pronounced for firms with mostly permanent earnings. Our results also show that Japanese analysts display larger forecast biases for earnings reported under U.S. GAAP as opposed to Japanese GAAP. Finally, we find that US. analysts discount information in earnings announcements to a larger degree (relying to a greater extent on information in past prices instead) when compared to their Japanese counterparts. Further, in contrast to their Japanese counterparts, these analysts display no optimistic bias. The results above suggest that the impact of each country's unique culture and capital norms will have to be taken into account by policy makers in evaluating the feasibility of harmonization of accounting standards.     

Understanding analysts' use of stock returns and other analysts' revisions when forecasting earnings

We investigate analysts' use of stock returns and other analysts' forecast revisions in revising their own forecasts after an earnings announcement. We find that analysts respond more strongly to these signals when the signals are more informative about future earnings changes. Although analysts underreact to these signals on average, we find that analysts who are most sensitive to signal informativeness achieve superior forecast accuracy relative to their peers and have a greater influence on the market. The results suggest that the ability to extract information from the actions of others serves as one source of analyst expertise.     

Analysts’ and Investors’ Reactions to Consistent Earnings Signals

We investigate (1) whether the trajectory of the current‐quarter earnings expectation path (defined by the signs of the forecast revision and the earnings surprise) provides information about future firm performance, and (2) the extent to which analysts and investors react to that information. Our results indicate that analysts underreact more to earnings information revealed by consistent‐signal earnings expectation paths than to earnings information communicated by inconsistent‐signal expectation paths. We also find that the current earnings expectation path provides incremental explanatory power for future abnormal returns, even after controlling for the sign and magnitude of the earnings surprise. Overall, our evidence is consistent with underreaction stemming from analysts’ and investors’ bias in processing the information in consistent‐signal earnings expectation paths.     

Information interpretation or information discovery: which role of analysts do investors value more?

This study provides evidence that a significant percentage of analyst forecast revisions are issued promptly after a broad set of corporate public disclosures and that investors perceive these prompt revisions as more valuable than nonprompt revisions. These results hold for all revisions, revisions outside of the earnings announcement window, or revisions in weeks preceding the earnings announcements and are also robust to various sensitivity tests. Investors particularly value analysts?? prompt interpretation of earnings announcements, Form 8-K filings, or certain qualitative news. To the extent that prompt revisions are more likely to reflect analysts?? information interpretation role, our results suggest that investors value more highly analysts?? ability to interpret public disclosures, especially less structured or non-financial disclosures, than their ability for information discovery.     

Underreaction to Industry‐Wide Earnings and the Post‐Forecast Revision Drift

We test whether the post‐forecast revision drift is mainly attributable to investors’ underreaction to industry‐wide earnings news conveyed by analysts’ forecast revisions. We find a large drift associated with industry‐wide earnings news but no drift associated with firm‐specific earnings news. Consistent with the functional fixation hypothesis, we provide evidence that the post‐forecast revision drift is driven by investors’ underreaction to the higher persistence of industry‐wide earnings. Although prior research has focused on differential persistence of earnings components stemming from managerial reporting discretion, we provide evidence suggesting that investors do not fully understand the differential earnings persistence attributable to industry fundamentals.     

Information misweighting and the cross-section of stock recommendations

This paper provides evidence that analysts whose earnings forecast revisions showed signs of greater exaggeration in the past make recommendation changes that lead to lower abnormal returns than their peers. Interpreting stock recommendations as a forecast of future abnormal returns, I show that this evidence is consistent with the hypothesis that analysts who typically exaggerate or overstate the weight of their private information when issuing forecasts also do so when making recommendations. The paper also shows that past earnings forecasts provide incremental information about analysts' recommending behavior beyond that contained in past recommendations.     

The Effect of Multinationality on Security Analyst Underreaction

Previous research presented evidence of bias and positive serial correlation in forecast errors suggesting that analysts do not properly recognize the time–series properties of earnings when setting expectations of future earnings. A reason for the security analyst underreaction is the level of multinationality of the firm's activities. This study shows that analysts underreact to prior information more as the level of multinationality of the firm examined increases.     

Analyst underreaction and the post-forecast revision drift

The post-forecast revision drift (PFRD), the phenomenon of delayed stock price reactions to analyst forecast revisions, is a well-documented market anomaly. Prior research attributes PFRD to underreaction by investors to analyst forecast revisions. This study investigates the role of the analyst forecast revision process itself in the PFRD anomaly. Using a large sample of US firms, we confirm prior findings of a positive serial correlation (momentum) in individual analysts’ revisions to their earnings forecasts and, based on both indirect and direct tests, document a positive association between this momentum and PFRD. Further analyses reveal that both the forecast revision momentum and PFRD vary in similar ways with respect to the nature of the news driving the revisions and the information environment. Collectively, our findings show that underreaction by individual analysts in the forecast revision process is an important contributor to the PFRD phenomenon.     

Learning and incentive: A study on analyst response to pension underfunding

There is a long-standing debate on whether sell-side analysts learn from their experience to improve earnings forecast skills. This study shows that incentive is an important factor for understanding the “learning by doing” effect by analysts. We examine analysts’ response to a complex type of information – corporate pension underfunding. Pension underfunding negatively impacts future earnings and analysts on average underreact to such information in their earnings forecasts. More importantly, when there is a strong incentive for analysts to deliver accurate forecasts, analyst learning effectively reduces their underreaction to pension underfunding information. On the other hand, when such an incentive is absent, the analyst learning effect is not discernible in the data. Further evidence suggests that analyst learning and incentive jointly reduce stock market mispricing associated with corporate pension underfunding.     

Dispersion in Analyst Forecasts and the Profitability of Earnings Momentum Strategies

This paper shows that the dispersion in analysts' consensus forecasts contains incremental information to predict future stock returns. Consistent with prior research, stock prices in the German market underreact to news about future earnings and drift in the direction suggested by analysts' forecasts revisions. Even higher abnormal returns can be achieved by applying such an earnings momentum strategy to stocks with a low dispersion in analyst forecasts. These results support one of the recent behavioural models in which investors underweight new evidence and conservatively update their beliefs in the right direction, but by too little in magnitude with respect to more objective information.     

证券分析师VS统计模型:证券分析师盈余预测的相对准确性及其决定因素

本文使用2005年35家券商对我国上市公司做出的每股盈余预测数据,考察了证券分析师盈余预测相对于统计模型的相对准确性及其决定因素。我们发现,我国证券分析师做出的盈余预测,同以年度历史数据为基础的统计模型得出的盈余预测相比,预测误差较小,证券分析师盈余预测具有一定的优势;但同某些以季度历史数据为基础的统计模型得出的盈余预测相比,预测误差较大,证券分析师盈余预测不具有优势。我们同时考察了决定证券分析师盈余预测相对准确性的决定因素。我们发现,公司每股盈余的波动性越大,公司上市越晚,跟踪公司的分析师越多,证券分析师的优势就越大。我们的研究对证券分析师以及投资者都有一定的启示作用。     

Investor and Analyst Reactions to Earnings Announcements of Related Firms: An Empirical Analysis

In this article I examine the response of investors and analysts of nonannouncing firms to the earnings report of the first announcers in the industry. The error in the earnings forecast of the first announcer is found to be informative about the errors in the contemporaneous earnings forecasts of subsequent announcers in the industry. However, investors and analysts do not appear to fully incorporate the information from the first announcers' news in their revised earnings expectations for subsequent announcers. This apparent underreaction to the first announcers' news leads to predictable stock returns for subsequent announcers in the days following the first announcement. Results of this study can be seen as further evidence of investor and analyst underreaction to publicly available information.     

The Information Content of Just-in-Time Inventory System Adoption Announcement

This paper examines the stock market reaction and analysts' earnings forecast revisions associated with just-in-time (JIT) inventory system adoption announcements. The stock market reaction is positive, however, analysts do not revise their earnings forecasts when firms announce a JIT adoption. The results of the paper show mixed support for the hypothesis that JIT is viewed by markets as a costly capital expenditure intended to increase the net cash flows of the firm and mixed support for the hypothesis that JIT is viewed by markets only as an accounting change.     

Financial Analysts' Earnings Forecast Dispersion and Intraday Stock Price Variability Around Quarterly Earnings Announcements

This study investigates the relationship between the dispersion of analysts' earnings forecasts and stock price variability around quarterly earnings announcements. Consistent with theoretical predictions, the empirical analysis shows that stock price variability at the time of earnings announcements is positively related to the degree of analysts' predisclosure earnings forecast dispersion. Additionally, firms with high levels of forecast dispersion exhibit significant increases in price variability for longer periods prior to and following earnings announcements than do firms with low levels of forecast dispersion. These results suggest that there is information about the earnings announcement that becomes available to at least a subset of investors prior to the earnings release and that market participants take different amounts of time to process the information conveyed by the earnings announcement.     

Investors' Use of Historical Forecast Bias to Adjust Current Expectations

We explore the extent to which investor response to earnings information differs in the presence of historical bias in earnings forecasts. Overall, the results are consistent with the notion that investors take historical forecast bias into account when interpreting information in earnings announcements and that the market's reaction to forecast errors is larger (less negative) when forecasts are historically more optimistic and suggests that the functional form commonly used in the earnings response literature does not appropriately capture the effect of real unexpected earnings information (i.e., investors' expectation errors as opposed to analysts' forecast errors) on stock returns.     

Earnings expectations,investor trade size,and anomalous returns around earnings announcements

We provide evidence that identifiable subsets of investors use significantly different information sets. Investors initiating large trades respond to analysts’ earnings forecast errors, while investors initiating small trades respond to a less-sophisticated signal that underestimates the implications of current earnings innovations for future earnings levels. This suggests small investors exhibit the behavior that Bernard and Thomas [Journal of Accounting and Economics 13, 305–340] theorize causes post-earnings announcement drift. We also use analysts’ forecasts to significantly improve the predictability of returns around earnings announcements previously documented by Bernard and Thomas. Finally, results attempting to link return predictability to the prevalence of small-investor trading are mixed.     

Tests of Analysts' Overreaction/Underreaction to Earnings Information as an Explanation for Anomalous Stock Price Behavior

This study examines whether security analysts underreact or overreact to prior earnings information, and whether any such behavior could explain previously documented anomalous stock price movements. We present evidence that analysts' forecasts underreact to recent earnings. This feature of the forecasts is consistent with certain properties of the naive seasonal random walk forecast that Bernard and Thomas (1990) hypothesize underlie the well-known anomalous post-earnings-announcement drift. However, the underreactions in analysts' forecasts are at most only about half as large as necessary to explain the magnitude of the drift. We also document that the “extreme” analysts' forecasts studied by DeBondt and Thaler (1990) cannot be viewed as overreactions to earnings, and are not clearly linked to the stock price overreactions discussed in DeBondt and Thaler ( 1985 , 1987 ) and Chopra, Lakonishok, and Ritter (Forthcoming). We conclude that security analysts' behavior is at best only a partial explanation for stock price underreaction to earnings, and may be unrelated to stock price overreactions.     

Earnings characteristics and analysts’ differential interpretation of earnings announcements: An empirical analysis

This study provides empirical evidence on factors that drive differential interpretation of earnings announcements. We document that Kandel and Pearson's forecast measures of differential interpretation are decreasing in proxies for earnings quality and pre‐announcement information quality. This evidence yields new and useful insights regarding which earnings announcements are less likely to generate newfound disagreement among analysts and investors. Recent research suggests that investor disagreement can increase investment risk, increase the cost of capital, and cause stock prices to deviate from fundamental value. Therefore, our results support prior intuition that increasing the quality of earnings and pre‐announcement information can improve the efficiency of capital markets.     

Taxable income,future profitability,and stock returns

Prior research suggests that investors behave ‘as if’ taxable income contains information about future performance by providing evidence of a positive association between taxable income and stock returns. We draw on the fundamental analysis literature and provide direct evidence on this assertion by examining whether taxable income predicts future pretax performance. We find that taxable income positively predicts future pretax cash flows, pretax book income, and ‘Street’ pretax earnings, suggesting that taxable income provides incremental information to book income regarding performance. Moreover, we find a positive association between taxable income and analysts’ pretax forecasts, consistent with analysts utilizing the information in taxable income when forming earnings expectations. We do not find an association between taxable income and future analyst forecast errors, implying analysts do not overreact or underreact to taxable income's performance signal. Overall, we find that taxable income provides a signal of fundamental value and corroborate the implications of prior research.     

Corporate Financial Policy,Information, and Market Expectations: An Empirical Investigation of Dividends

This paper documents a relationship between announcements of unexpected changes in financial policy and unexpected changes in performance of the firm. Using a new methodology that combines analysis of stock price movements and earnings forecast data, the authors provide evidence that analysts revise their earnings forecasts following the announcement of an unexpected dividend change by an amount positively related to the size of the unexpected dividend change. They also provide evidence that these revisions are positively related to the change in equity value surrounding the announcement. Further, they find that these revisions are consistent with rationality. Their results therefore provide direct evidence consistent with the hypothesis that unexpected dividend changes signal information about firm performance to market participants.