Underreaction to Industry-Wide Earnings and the Post-Forecast Revision Drift
48 Pages Posted: 16 Jan 2011 Last revised: 11 Jul 2012
Date Written: July 1, 2012
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. While 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.
Keywords: Post Forecast Revision Drift, Underreaction, Industry-Wide Earnings, Firm-Specific Earnings
JEL Classification: G14, M41
Suggested Citation: Suggested Citation