Review of Accounting Studies, 9, 59–96, 2004
# 2004 Kluwer Academic Publishers. Manufactured in The Netherlands.
Analyst Earnings Forecast Revisions and the Pricing
MARY E. BARTH* email@example.com
Stanford University, Graduate School of Business, Stanford, CA 94305
AMY P. HUTTON firstname.lastname@example.org
Tuck School of Business, Dartmouth College, Hanover, NH 03755
Abstract. We investigate the relation between two market anomalies to provide insights into analysts’ role
as information intermediaries. Prior research ﬁnds that accruals and analyst earnings forecast revisions
predict future returns. We ﬁnd that the accrual and forecast revision strategies generate hedge returns of
15.5% and 5.5% when implemented independently. Strikingly, a combined strategy that uses forecast
revisions to reﬁne the accrual strategy generates a hedge return of 28.5%. Firms with consistent accrual
and forecast revision signals have less persistent accruals and earnings. We also ﬁnd that accruals can be
used to reﬁne the forecast revision strategy—high accruals are associated with overoptimism in analyst
forecasts. Our ﬁndings indicate that although forecast revisions reﬂect information about accrual and
earnings persistence beyond that reﬂected in the level of current year accruals, investors do not fully
incorporate this information into their valuation assessments.
Keywords: accruals, analysts, pricing anomaly
JEL Classiﬁcation: G14, M41
This study tests whether revisions of analyst earnings forecasts reﬂect information
about earnings persistence beyond that implied by the accrual component of current
year’s earnings, and whether this additional information is reﬂected in share prices.
The motivation for the study is to enhance our understanding of the role of
information intermediaries, speciﬁcally ﬁnancial analysts, in facilitating investors’
assessment of the valuation implications of accounting data. Prior research
demonstrates that earnings with a large accrual component, relative to cash ﬂow,
are less persistent and the differential persistence of earnings components, although
relevant for assessing ﬁrm value, is largely ignored by investors. If ﬁnancial analysts
are effective information intermediaries, their forecast revisions should facilitate
more accurate pricing of accruals. We expect analyst forecast revisions to reveal
information about earnings persistence beyond that obtained from the accrual
component of earnings, because analysts likely use a variety of information sources
when developing their earnings forecasts.