IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this article

Do Investors Under-React to Information in Analysts' Earnings Forecasts?

Listed author(s):
  • William D. Brown, Jr
  • Ray J. Pfeiffer, Jr
Registered author(s):

    In this paper, we highlight important consequences of the choice of deflator for conclusions regarding apparent patterns in stock returns. In particular, we focus on the use of share price as a deflator. Previous research has documented that there are patterns in stock returns related to the magnitude of share price, and consequently this relation has the potential to confound inferences about information variables that are scaled by share price. We show analytically the potentially misleading effects of using share price as a deflator in abnormal returns tests and identify several studies in the literature that have deflated candidate anomaly variables by price. We then select one previous finding-evidence of abnormal returns to a strategy based on share-price-scaled analysts' forecasts-as an exemplar of the problem. Taken as a whole, our findings indicate that after controlling for the systematic negative relation between share price and subsequent abnormal return there is no apparent mis-weighting by investors of the information in analysts' earnings forecasts or abnormal returns to an investment strategy based on analysts' forecasts. These findings suggest that caution is warranted in the selection of deflators in anomaly studies and in the interpretation of findings of abnormal returns to share-price-scaled information variables. Copyright (c) 2008 The Authors Journal compilation (c) 2008 Blackwell Publishing Ltd.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    File Function: link to full text
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Wiley Blackwell in its journal Journal of Business Finance & Accounting.

    Volume (Year): 35 (2008-09)
    Issue (Month): 7-8 ()
    Pages: 889-911

    in new window

    Handle: RePEc:bla:jbfnac:v:35:y:2008-09:i:7-8:p:889-911
    Contact details of provider: Web page:

    Order Information: Web:

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:bla:jbfnac:v:35:y:2008-09:i:7-8:p:889-911. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)

    or (Christopher F. Baum)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.