Revisions of earnings forecasts and security returns: evidence from three countries

Prior evidence has demonstrated that for North American markets EPS forecast revisions are associated with security price changes, although this evidence is much stronger for pre-announcement changes than for post-announcement. As there is considerable interest in using analysts' forecasts for stock selection purposes in Europe, it is clearly of some importance to determine whether forecast revisions are associated with security returns, and whether the revisions can be used to trade successfully. We use a large sample of individual analysts' forecast revisions in Europe's three largest markets - the U.K., France and Germany ? and demonstrate that forecast revisions follow significant abnormal returns and can also be used to identify significant, post announcement returns. This result is found in all years bar one, is stronger for the U.K. than the other markets, for downward than for upward revisions, for less researched rather than more researched firms and for forecasts diverging from the consensus rather than converging. Although surprisingly strong evidence against the EMH these results are consistent with certain other studies which also demonstrate delayed market reaction to news.