Analyst Forecast Revision and Market Price Discovery Following Accounting Restatement

Abstract

We examine whether two qualitative attributes of a forecast revision, analyst characteristics and innovation, explain investors' reaction to the revision signal. We exploit a setting in which increased uncertainty about the firm's future economic performance may stimulate investor demand for high quality analyst research. In this type of information environment, we predict that investors are more able and willing to incorporate the information that analyst characteristics convey about relative forecast accuracy when they receive high-innovation revision signals than when they receive low-innovation signals. The results, from a sample of 8,953 individual forecast revisions for 478 U.S. firms announcing restatements between 1995 and 2003, are consistent with our expectations. We find that high-innovation revisions are associated with greater investor use of accuracy-related factors, leading to faster price discovery for these revision signals. However, uncertainties surrounding the restatements may adversely affect investor ability to assimilate potentially informative aspects of a revision signal.