Using analysts’ earnings forecasts for country/industry-based asset allocation

Purpose – This paper seeks to investigate the usefulness of analysts’ earnings forecast revisions in the allocation of funds to different industries and countries. In particular, it asks whether a post analyst revision announcement drift in prices can be exploited to guide an asset allocation strategy based on industry, or country, selection. Design/methodology/approach - The methodolgy is to use monthly consensus I/B/E/S – First Call analysts’ earnings forecasts for companies listed on the main European stock markets over the period January 1987 to December 2001. Findings - It is found that a significant post revision announcement effect for individual companies. However, the abnormal returns evaporate away as the research moves from an individual company level to an industry or country level. The paper provides two kinds of evidence which seem to cast doubt on the analysts’ ability to fully incorporate industry and country specific information into their forecasts: returns are driven more by common components than earnings forecast revisions, and company specific news reflected by the revision signal dominates industry or country news. Originality/value - Locates the origin of stock price momentum strategies in news about earnings reflected in analysts’ forecasts revisions.