Can active managers profit from earnings forecast ...



Title Can active managers profit from earnings forecast revisions?
Author(s) Sean M. Hennessey
Date 1993
Volume 6
Issue 2
Start page 39
Abstract Furthermore, if analysts revise their earnings expectations for a company, share prices are expected to shift in the direction of that forecast revision in the period the revision is announced. In the period subsequent to the revision, security returns should be random. The extent of the share price movement should also be related to the size of the revision -- the larger the revision (positive or negative), the more pronounced the share price movement (positive or negative). This article explores share price movements in the 25 - month period around earnings forecast revisions: 12 months prior to the revision, the month of the revision (Month 0), and 12 months subsequent to the revision.[3] The revisions were then assigned to a Positive Revision Portfolio (PRP), Negative Revision Portfolio (NRP) or a Non - Revision Portfolio (NON). Mean excess returns for the three revision portfolios for each month of the test period were calculated by cumulating the excess returns for each of the revisions and dividing by the number of revisions for month t. Cumulative abnormal (excess) returns (CARs) were also calculated for the revision portfolios over various months of the 25 - month test period by simply adding the appropriate monthly excess returns for the portfolio across time. (These procedures were repeated for the calculation of mean and cumulative nominal returns.) To explore the impact of revision size on excess returns, two revision filter portfolios were formed on the basis of revision size: revisions greater (less) than 5% and 10%. The excess returns associated with this investment strategy is provided in Table III and Figure II. For the PRP filters, the CARs in the period prior to the revision are similar in magnitude to the complete sample. In the period subsequent, however, the striking feature is that the CARs become progressively larger as the analysis moves from all positive revisions to those which are greater than 5% and 10%. For example, for the 10% filter portfolio, the CAR in the period +1 to +12 is 18.2%, while in the +1 to +3 period, it is 6.6%, or 26.4% on an annual basis. The magnitude of these returns is remarkable.

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