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Underreaction to Industry-Wide Earnings and the Post-Forecast Revision Drift


  • 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.


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.