Examining the Informational Role of Analysts’ Forecasts and its Impact on the Relation between Earnings Surprises and Investors’ Responses

Publication Type

Conference Paper

Publication Date



Prior research documents the existence of two distinct post-earnings announcement drifts. Interestingly, investors seem to underreact more toward earnings announcements that are associated with analyst-based earnings surprises (hereafter AF drift) than that based on seasonal random walk earnings surprises (hereafter RW drift). Several explanations have been put forward to examine differences in hedge returns between the AF drift and the RW drift. We utilize a relative measure of investor underreaction to compare the extent of delayed market reaction between both drifts. Using this measure, we find that investors react proportionately faster to analyst-based earnings surprises than to random-walk earnings surprises. We also examine why the AF drift has declined substantially over the years. Finally, we show that there is significant cross-sectional variation for our measure with various firms’ information environment attributes.


Accounting | Portfolio and Security Analysis

Research Areas

Financial Intermediation and Information


American Accounting Association Annual Meeting

City or Country

Washington DC, USA