Using analysts’ earnings forecasts for country/industry‐based asset allocation
Abstract
Purpose
This paper seeks to investigate the usefulness of analysts’ earnings forecast revisions in the allocation of funds to different industries and countries. In particular, it asks whether a post analyst revision announcement drift in prices can be exploited to guide an asset allocation strategy based on industry, or country, selection.
Design/methodology/approach
The methodolgy is to use monthly consensus I/B/E/S – First Call analysts’ earnings forecasts for companies listed on the main European stock markets over the period January 1987 to December 2001.
Findings
It is found that a significant post revision announcement effect for individual companies. However, the abnormal returns evaporate away as the research moves from an individual company level to an industry or country level. The paper provides two kinds of evidence which seem to cast doubt on the analysts’ ability to fully incorporate industry and country specific information into their forecasts: returns are driven more by common components than earnings forecast revisions, and company specific news reflected by the revision signal dominates industry or country news.
Originality/value
Locates the origin of stock price momentum strategies in news about earnings reflected in analysts’ forecasts revisions.
Keywords
Citation
Forbes, W., Huijgen, C. and Plantinga, A. (2006), "Using analysts’ earnings forecasts for country/industry‐based asset allocation", Managerial Finance, Vol. 32 No. 4, pp. 317-336. https://doi.org/10.1108/03074350610652251
Publisher
:Emerald Group Publishing Limited
Copyright © 2006, Emerald Group Publishing Limited