'Other information' as an explanatory factor for the market reactions to firms' meeting or beating analyst forecasts
Chen, Vincent Y. S.
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Although analyst forecasts are one of the most critical thresholds for setting the market's expectations, the meeting of analyst forecasts is not always followed by a positive market reaction. In this study, I find that the market reacts negatively to 41 percent of firms that meet or beat analyst forecasts and positively to 44 percent of firms that miss analyst forecasts. Intuitively, the seemingly counterintuitive market reactions to firms' meeting or beating analyst forecasts indicate that the market's expectations about a firm's future earnings is based not only on earnings but also on 'other information'. I estimate the content of 'other information' in analyst forecasts as a basis for the seemingly opposite direction of the market reactions and find that content to be an explanatory factor. Specifically, I find that the market values a firm's long-run growth, market risk, forecast precision, accounting loss, price decreases from the prior quarter and the past history of meeting or beating analyst forecasts when assessing the firm's meeting or beating analyst forecast expectations. I also find the evidence, however, that the market overestimates the persistence of the other information in analyst forecasts about future earnings. Overall, I find that the market does not functionally fixate on earnings when valuing firms' meeting or beating analyst forecasts. The consequences of capital market concerns of the meeting or beating analyst expectations seem to have been overemphasized.