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Investors’ Reactions to Analysts’ Forecast Revisions and Information Uncertainty: Evidence of Stock Price Drift

Hou, Tony Chieh-Tse; Hung, Weifeng; Gao, Simon S


Tony Chieh-Tse Hou

Weifeng Hung


This study examines the relationship among analysts’ earnings forecast revisions, information uncertainty, and stock returns and provides new evidence that stock price drift occurs after analysts’ earnings forecast revisions. Using data from the Australian stock market over the period of 1992 to 2009, we find that the stocks with upward earnings revisions experience positive returns, while stocks with downward revisions have negative returns. The effect is more prominent in stocks with high information uncertainty. The results are robust after controlling for market conditions, seasonality, and risks. Our evidence supports the conservatism bias model that investors tend to underweight the public information, such as analysts’ earnings forecast revisions. Importantly, our evidence provides possible explanations about the violation of the efficient market hypothesis. Our results suggest that the conservative bias causes investors not to sufficiently update their beliefs and eventually results in subsequent return continuation as investors’ underreaction to analysts’ earnings forecast revision is stronger with higher information uncertainty.

Journal Article Type Article
Online Publication Date Apr 30, 2014
Publication Date 2014-07
Deposit Date May 7, 2015
Journal Journal of Accounting, Auditing and Finance
Print ISSN 0148-558X
Electronic ISSN 2160-4061
Publisher SAGE Publications
Peer Reviewed Peer Reviewed
Volume 29
Issue 3
Pages 238-259
Keywords analysts’ forecast revisions; investor behaviour; information uncertainty; stock price drift; Australian stock market;
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