The role of analyst forecasts in the momentum effect

Rand Kwong Yew Low*, Enoch Tan

*Corresponding author for this work

Research output: Contribution to journalArticleResearchpeer-review

11 Citations (Scopus)

Abstract

We evaluate the extent to which sell-side equity analysts can facilitate market efficiency when there is increasing uncertainty about a stock's future value. The prevalence of the 52-week-high momentum anomaly, that can be largely attributed to information uncertainty, provides a setting for examining the value and timing of analysts’ earnings forecast revisions. Our study finds that analysts can provide value-relevant signals to investors by picking up indicators of momentum. The ability to identify under or over-valued stocks suggests that analysts are important information intermediaries in the price-continuation momentum effect. However, we also observe pervasive asymmetric reaction to good and bad news throughout our study that is consistent with incentive-driven reporting and optimistic biases. Nevertheless, analysts’ forecast revisions are informative at different stages to re-establish stock prices back to their fundamental valuation.

Original languageEnglish
Pages (from-to)67-84
Number of pages18
JournalInternational Review of Financial Analysis
Volume48
DOIs
Publication statusPublished - 1 Dec 2016
Externally publishedYes

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