Review of Accounting Studies, 5, 259–272 (2000)
2000 Kluwer Academic Publishers, Boston. Manufactured in The Netherlands.
Analyst Forecasting Ability and the Stock Price
Reaction to Forecast Revisions
CHUL W. PARK
The Hong Kong University of Science & Technology
EARL K. STICE
Brigham Young University
Abstract. We empirically identify superior analysts using their past forecasting track record for a speciﬁc ﬁrm’s
earnings and demonstrate that subsequent forecast announcements by these superior analysts have a greater impact
on security prices than do the forecasts of other analysts. We ﬁnd that, in our sample, the price effects of this
ﬁrm-speciﬁc forecasting ability do not spill overto other ﬁrms followed by the same analyst. We also demonstrate
that an analyst’s forecasting ability with respect to the earnings of a certain ﬁrm is relatively more important in
the period immediately preceding an earnings announcement by that ﬁrm.
Keywords: Financial analysts, earnings forecasts, reputation
In this paper, we establish a link between an analyst’s prior forecasting ability and the
magnitude of the price reaction to subsequent forecast revisions made by the same analyst
for the same ﬁrm. We classify an analyst as being superior with respect to a certain ﬁrm if
80% or more of the analyst’s forecasts for that ﬁrm in the preceding two years were closer
to actual earnings than was the I/B/E/S consensus forecast existing at the time the forecasts
were given. We show that forecast revisions by superior analysts have a greater impact
on security prices, and are more closely related to forecast announcement returns, than are
revisions by inferior analysts.
We also attempt to document a spillover effect in which superior forecasting ability with
respect to the earnings of one ﬁrm results in an analyst’s forecast revisions for other ﬁrms
having a greater impact on security prices. With our sample of widely-followed ﬁrms, and
using our measure of forecasting ability, we are unable to ﬁnd any spillover effect. As a
result, we conclude that the superior forecasting ability that we document is with respect to
the earnings of a speciﬁc ﬁrm.
Finally, we also examine forecast revision timing to determine when prior forecasting
ability has a larger impact on the price reaction to a revision announcement. We ﬁnd that
prior forecasting ability is more important in the period immediately preceding an earnings
announcement; that is, in the 30 days preceding an earnings announcement, revisions by
superior analysts have a greater impact on prices than do forecasts by other analysts. On the
other hand, prior forecasting ability has no impact on the price reaction to forecast revision
announcements made in the 30 days after an earnings announcement.