Do Investors Respond to Analysts' Forecast Revisions as if Forecast Accuracy Is All That Matters?

Abstract

Prior research suggests that investors' response to analyst forecast revisions increases with the analyst's forecast accuracy. We extend this research by examining whether investors appear to extract all of the information that analyst characteristics provide about forecast accuracy. We find that only some of the analyst characteristics that are associated with future forecast accuracy are also associated with return responses to forecast revisions. This suggests that investors fail to extract some of the information that analyst characteristics can provide about future forecast accuracy. In addition, forecast properties other than expected accuracy appear to be value-relevant. For example, investors respond more strongly to forecasts released earlier in the year and to forecasts by analysts employed by large brokerages than appears warranted by the ability of forecast timeliness and broker size to predict forecast accuracy. We conclude that investors respond to analysts' forecast revisions as if forecast accuracy is not all that matters.