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Analyst Forecasts and the Cross Section of European Stock Returns

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  • Phillip J. McKnight
  • Steven K. Todd

Abstract

We examine revisions to earnings forecasts by equity analysts and their role in predicting stock returns. We provide evidence that European stocks with net upward revised forecasts earn higher future returns than otherwise similar stocks. This effect is not concentrated in small stocks, stocks with low analyst coverage, or stocks with low book‐to‐market ratios. We find differences in the return continuation patterns of stocks with upward versus downward revisions, namely, bad news travels quickly, but good news travels slowly. This result is consistent with investors' attaching greater significance to poor earnings forecasts, but adopting a wait‐and‐see approach to good news.

Suggested Citation

  • Phillip J. McKnight & Steven K. Todd, 2006. "Analyst Forecasts and the Cross Section of European Stock Returns," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 15(5), pages 201-224, December.
    • Handle: RePEc:wly:finmar:v:15:y:2006:i:5:p:201-224
    DOI: 10.1111/j.1468-0416.2006.00117.x
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