Accepted by Douglas Skinner. We gratefully acknowledge the comments of Abbie Smith (prior editor), an anonymous referee, Linda Bamber, Sanjeev Bhojraj, Dan Dhaliwal, Gilles Hilary, Bin Ke, Karen Nelson, and workshop participants at the Chinese University of Hong Kong, Cornell University, Hong Kong University of Science and Technology, INSEAD, McMaster University, Nanyang Technology University of Singapore, and Rice University.
Underreaction to Industry-Wide Earnings and the Post-Forecast Revision Drift
Version of Record online: 26 FEB 2013
Copyright ©, University of Chicago on behalf of the Accounting Research Center, 2013
Journal of Accounting Research
Volume 51, Issue 4, pages 701–737, September 2013
How to Cite
HUI, K. W. and YEUNG, P. E. (2013), Underreaction to Industry-Wide Earnings and the Post-Forecast Revision Drift. Journal of Accounting Research, 51: 701–737. doi: 10.1111/1475-679X.12006
- Issue online: 12 JUL 2013
- Version of Record online: 26 FEB 2013
- Accepted manuscript online: 17 JAN 2013 05:26AM EST
- Manuscript Accepted: 2 JAN 2013
- Manuscript Received: 15 FEB 2011
We test whether the post-forecast revision drift is mainly attributable to investors’ underreaction to industry-wide earnings news conveyed by analysts’ forecast revisions. We find a large drift associated with industry-wide earnings news but no drift associated with firm-specific earnings news. Consistent with the functional fixation hypothesis, we provide evidence that the post-forecast revision drift is driven by investors’ underreaction to the higher persistence of industry-wide earnings. Although prior research has focused on differential persistence of earnings components stemming from managerial reporting discretion, we provide evidence suggesting that investors do not fully understand the differential earnings persistence attributable to industry fundamentals.