Abstract
PurposeThis study examines the relation between the presence of analysts’ long-term growth (LTG) forecasts and the post-earnings-announcement drift (PEAD).Design/methodology/approachUsing a sample of firm-quarters from 1995 to 2013, the author conducts various regression analyses.FindingsThe author finds that the magnitude of PEAD is significantly smaller for firms with LTG forecasts. The relationship holds after controlling for a wide range of explanatory variables for PEAD returns or for the presence of LTG forecasts. The author further investigates three nonexclusive hypotheses to explain this relationship. First, LTG forecasts may convey incremental value-relevant information that facilitates investors’ processing of short-term earnings information. Second, the presence of LTG forecasts may indicate superiority in analysts’ short-term forecast ability and identify firms with more efficient short-term forecasts. Third, the presence of LTG forecasts may be associated with cross-sectional differences in the persistence of earnings surprises. The author finds that none of these fully accounts for the negative relationship between the presence of LTG forecasts and PEAD returns. Instead, the relationship may be a result of the presence of LTG forecasts capturing some unobservable firm characteristics beyond those identified in prior studies.Originality/valueThis study contributes to the PEAD literature by identifying a novel analyst-based predictor of the cross-sectional variation in PEAD returns.
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