How Completely Do Analysts Incorporate Firm-Specific and Industry Information in Their Forecasts? Evidence and Implications for Post-Forecast Revision Drift

Prior studies find a positive relation between analyst forecast revisions and upcoming news, suggesting that analysts’ forecast revisions are incomplete with respect to available information. In this study, we use the association between forecast revisions and upcoming news to measure forecast completeness and show that post-forecast-revision drift is higher when forecasts are incomplete. We follow Hui and Yeung’s (2013) approach to separate forecast revision news into industry-wide and firm-specific components because they find that drift is primarily associated with the industry component. We find that forecast revisions are less complete for industry-wide news than for firm-specific news. Furthermore, analysts’ industry-wide revisions are less complete early in the year and when the underlying news is bad, and we find stronger post-forecast-revision drift in those cases. We also show that analysts who were optimistic in prior periods tend to issue forecasts that are less complete and that generate stronger drift than forecasts by other analysts. Our findings provide an explanation for the drift that contrasts with prior studies that attribute the drift to investors’ slow assimilation of the news in forecast revisions. Thus, our study sheds light on analysts’ role in conveying firm-specific and industry-wide news to investors and on the implications for post-forecast-revision drift.

Asymmetric Information: Tinjauan Berdasarkan Rekomendasi Analis Sekuritas dan Revisi Earning Forecast

Trading in the stock market occur due to differences in opinion on the expected value of the securities. In the other side, asymmetric information between investors and companies caused the stock price does not reflect the real price. So, asymmetric information should be reduced. Information by securities analysts is an information that is expected to reduce that. This study investigates the performance of securities analysts through its role in reducing asymmetric information. This is motivated by some previous studies that stated that the Indonesian capital market is inefficient, because high levels of asymmetric information. Analysts is considered as inform market participant who can reduce the asymmetric information so as to make capital market to be efficient. The role of securities analysts is seen through the product. There are stock recommendation and earnings forecast revision. Testing the consistency of the analyst's stock recommendations and earnings forecast revision before testing their impact on asymmetric information. The results showed that output in the form of stock securities analysts and earnings forecast recommendation are consistent but has not been able to reduce the asymmetry of information that occurs between investors and companies.