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Dispersion in Analyst Forecasts and the Profitability of Earnings Momentum Strategies
Author(s) -
Dische Andreas
Publication year - 2002
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/1468-036x.00185
Subject(s) - earnings , economics , stock (firearms) , dispersion (optics) , momentum (technical analysis) , profitability index , consensus forecast , financial economics , econometrics , earnings surprise , post earnings announcement drift , earnings response coefficient , finance , engineering , mechanical engineering , physics , optics
This paper shows that the dispersion in analysts’ consensus forecasts contains incremental information to predict future stock returns. Consistent with prior research, stock prices in the German market underreact to news about future earnings and drift in the direction suggested by analysts’ forecasts revisions. Even higher abnormal returns can be achieved by applying such an earnings momentum strategy to stocks with a low dispersion in analyst forecasts. These results support one of the recent behavioural models in which investors underweight new evidence and conservatively update their beliefs in the right direction, but by too little in magnitude with respect to more objective information.