The role of analyst forecasts in the momentum effect

- Analysts provide value-relevant signals after accounting for momentum indicators.
- Analysts are information intermediaries in the price-continuation momentum effect.
- There is a pervasive asymmetric reaction to good and bad news.
- Larger (Smaller) post-forecast revision drift in Sell (Buy) revision portfolios
- Findings consistent with incentive-driven reporting and optimistic biases

We evaluate the extent to which sell-side equity analysts can facilitate market efficiency when there is increasing uncertainty about a stock's future value. The prevalence of the 52-week-high momentum anomaly, that can be largely attributed to information uncertainty, provides a setting for examining the value and timing of analysts' earnings forecast revisions. Our study finds that analysts can provide value-relevant signals to investors by picking up indicators of momentum. The ability to identify under or over-valued stocks suggests that analysts are important information intermediaries in the price-continuation momentum effect. However, we also observe pervasive asymmetric reaction to good and bad news throughout our study that is consistent with incentive-driven reporting and optimistic biases. Nevertheless, analysts' forecast revisions are informative at different stages to re-establish stock prices back to their fundamental valuation.