Information is the key point in efficient market hypothesis and one of the important sources of information for investors is from stock analysts. There are tremendous literatures in this regard. Most of the empirical researches demonstrate that positive (negative) returns following the positive (negative) earnings news. The analysts’ revision of their forecasts is also an important factor to influence the stock returns and it is also well documented in literatures. But there are not many empirical works to deal with the information uncertainty issue. The latest research in this area is Zhang (2006).
We are motivated by his findings. Since Zhang’s study focuses on the U.S. market, our goal is to investigate whether the stock returns continuation patterns outside U.S. will be the same. Australia capita market is the perfect study target due its distance from U.S. markets but with similar economic activities patterns which mean their stocks are well covered by analysts. This prompts us to investigate the analysts’ forecast revision and information uncertainty phenomenon in Australia stock market.
The earlier analysts forecasts revisions researches are from Griffin (1976), Givoly and Lakonishok (1979, 1980), Elton et al. (1981) and Imhoff and Lobo (1984) and the common argument for these literature is that analysts forecasts revisions do carry new information to the investors. Stickel (1991) finds that favorable analysts’ forecasts revisions stocks will continue earn more abnormal returns than less favorable analysts’ ones. Chan et al. (1996) argue that this post analysts’ revisions price drift is due to the “momentum” strategies. Hong, Lim and Stein (2000) discover that momentum profits are from small firms with fewer analysts’ coverage.
Underreaction of analyst to some information also attracts attention from researchers. Lys and Sohn (1990), Abarbanell (1991), Mendenhall (1991), Abarbanell and Bernard (1992), and Ali, Klein and Rosenfeld (1992) are the early researchers who find the evidence of analysts’ underreaction to certain information. Barberis, Shleifer and Vishny (1998) find that investors react less to analysts’ forecasts revisions, particularly for the favorable revision. Some behavioral financial theorists argue that market efficiency is because of the psychological biases which affect market prices (e.g., Barberis, Shleifer and Vishny, 1998; Daniel Hirshleifer and Subramanyam, 1998).
Hirshleifer (2001) further argues that uncertainty of stocks and absence of correct feedback mechanism about the stock’s fundamental may cause the psychological biases. Easterwood and Nutt (1999) discover that analysts overreact to positive information but underreact to negative information. Gu and Xue (2005) argue that analyst’s overreaction to good news is a reasonable response when the uncertainty is high and this overreaction should not be interpreted as the psychological bias. The work of Zhang (2006) demonstrates that when uncertainty is greater, positive returns following good news is greater than negative returns following bad news. His result also supports the underreaction hypothesis.
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Forecast Revision and Information Uncertainty in Australia Stocks
