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The hot-growth companies: How well do analysts predict their performance?

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  • Yu, Susana
  • Lord, Richard A.
  • Webb, Gwendolyn
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    Abstract

    We assess several aspects of analysts' forecasting performance for stocks included in Business Week's annual list of 100 "hot-growth" companies. We find that analysts underestimate earnings before stocks are included in the list, and they tend to overestimate them afterward. However, analysts revise their earnings estimates downward after stocks are included in the list, and the largest downward revisions are followed by significant negative stock returns. We conclude that analysts correctly assess the diminished prospects of stocks designated as "hot-growth" companies and that their forecast revisions have significant predictive power and value.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economics and Business.

    Volume (Year): 62 (2010)
    Issue (Month): 3 (May)
    Pages: 195-219

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    Handle: RePEc:eee:jebusi:v:62:y::i:3:p:195-219

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    Web page: http://www.elsevier.com/locate/jeconbus

    Related research

    Keywords: Earnings forecast Earning surprise Estimate revisions;

    References

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    1. John E. Core & Wayne R. Guay & Tjomme O. Rusticus, 2006. "Does Weak Governance Cause Weak Stock Returns? An Examination of Firm Operating Performance and Investors' Expectations," Journal of Finance, American Finance Association, vol. 61(2), pages 655-687, 04.
    2. Rafael La Porta & Josef Lakonishok & Andrei Shleifer & Robert Vishny, 1995. "Good News for Value Stocks: Further Evidence on Market Efficiency," NBER Working Papers 5311, National Bureau of Economic Research, Inc.
    3. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
    4. Clarke, Jonathan & Ferris, Stephen P. & Jayaraman, Narayanan & Lee, Jinsoo, 2006. "Are Analyst Recommendations Biased? Evidence from Corporate Bankruptcies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 41(01), pages 169-196, March.
    5. Klein, April, 1990. "A direct test of the cognitive bias theory of share price reversals," Journal of Accounting and Economics, Elsevier, vol. 13(2), pages 155-166, July.
    6. Abarbanell, Jeffery S., 1991. "Do analysts' earnings forecasts incorporate information in prior stock price changes?," Journal of Accounting and Economics, Elsevier, vol. 14(2), pages 147-165, June.
    7. W. Scott Bauman & C. Mitchell Conover & Don R. Cox, 2002. "Are the Best Small Companies the Best Investments?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 25(2), pages 169-186.
    8. Louis K. C. Chan & Jason Karceski & Josef Lakonishok, 2003. "The Level and Persistence of Growth Rates," Journal of Finance, American Finance Association, vol. 58(2), pages 643-684, 04.
    9. Ronald C. Anderson & David M. Reeb, 2003. "Founding-Family Ownership and Firm Performance: Evidence from the S&P 500," Journal of Finance, American Finance Association, vol. 58(3), pages 1301-1327, 06.
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