ANALYZING IMPACT OF FORECAST REVISIONS ON QUARTERLY EARNING ANNOUNCEMENTS

Open Access
Author:
Ayala, Vinay
Area of Honors:
Finance
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
  • Joseph Randall Woolridge, Thesis Supervisor
  • James Alan Miles, Honors Advisor
Keywords:
  • Analyst forecasts
  • estimates
  • earnings
Abstract:
The accuracy of sell side research analysts has always been put into question. While the market has an understanding of the inaccuracy of research analysts, it is still subject to behavioral biases that can lead to over-optimism and over-pessimism in the marketplace. This thesis attempted to find a trading strategy to take advantage of possible overreaction in the equity markets. While the study failed to find a successful trading strategy, analysis did find that during an earnings announcement, stock prices will move in the opposite direction of stock price movement and EPS estimate changes throughout the quarter if they were large magnitude changes (greater than 8%) about 2/3 of the time. This suggests that options could be a useful portfolio hedge prior to earnings announcement, providing a cheap form of insurance against adverse price movements. It also confirmed that analysts exhibit a positive bias in their EPS forecast estimates. Finally, the thesis suggests re-conducting the analysis utilizing a highly specified data set, such as small-mid capitalization stocks with low analyst coverage.