What Story Does an Inconsistent Analyst Forecast Tell?

• In Event: Financial Accounting and Reporting 10

Abstract

We contribute to the literature examining inconsistent analyst forecast revisions occurring in the three day window following a firm’s annual earnings announcement. We find that the nature of the inconsistency (either a positive revision following a negative earnings surprise or a negative revision following a positive earnings surprise) is an important consideration in the determinant, market response and analyst accuracy models and which does not appear to have been considered in the prior literature. We find that individual analyst characteristics (prior accuracy and size of brokerage) play a larger role in the analyst deciding whether to issue a negative revision following a positive earnings surprise, which suggests that that form of inconsistency is potentially more risky for the analyst. Additionally, we find that analysts that issue positive revisions are more accurate than those issuing negative revisions, regardless of the direction of the earnings surprise, suggesting that management favor is a more important consideration than whether or not the revision is inconsistent or not.

Authors

• Sanghyuk Byun, Sogang University

• Kristin Roland, University of North Carolina Charlotte