Abstract
This paper investigates the information content of analysts’ earnings forecast revisions for Brazilian companies, defined as the ability to change stock prices. Using data from I/B/E/S and Economatica covering the period from 1995 through 2002, we find that forecast revisions that follow the consensus (herding behavior) provide small information content. A forecast revision is more informative when it deviates from the consensus, both in the case of good or bad news. Momentum is the main element to explain the behavior of stock returns in light of revised earnings forecasts. The results provide evidence that these revisions are largely based on previous stock performance. The findings are relevant, especially for those that use analysts’ earnings forecasts in their valuation models, as well as portfolio managers and individual investors.
Highlights
The rising importance of stock market analysts in Brazil is evidence of the growing importance of the capital market to the country’s economy
As agents that propagate information, analysts play an important role in consolidating market expectations, and these expectations are the drivers of stock prices
To measure the magnitude of a revision (MagRev), we looked at the difference between the earnings per share (EPS) projected in the new revision and the figure from the last forecast from the same analyst, measuring this difference in terms of the absolute value of the previous prediction
Summary
The rising importance of stock market analysts in Brazil is evidence of the growing importance of the capital market to the country’s economy. As agents that propagate information, analysts play an important role in consolidating market expectations, and these expectations are the drivers of stock prices. As they receive new information, analysts revise their projections. These revisions reflect the changes in expectations of a company’s future performance. A share’s liquidity and price volatility can be affected by revisions. These last two effects are interesting, this study concentrates only on stock prices. We identify the market-adjusted return of these revisions for Brazilian companies, by tabulating the data by type of revision. We carry out regressions to provide more robust conclusions
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