The applicability of the fraud on the market presumption to analysts forecasts. Working Paper

The application of the fraud on the market presumption to security analysts ’ forecasts requires that those forecasts materially influence share prices in an efficient market. We provide evidence on the pervasiveness of reliably (i.e., statistically significant at conventional levels) unusual (larger than movements that occur on non-event days) price responses to analysts ’ forecasts. Relative to the average price movement on non-event days, we find that the mean price response to analysts ’ forecasts is reliably unusual, and the median response is not (in fact, the median indicates smaller price movements on forecast days than on the average of non-event days). In contrast, price responses to earnings announcements and to management forecasts exhibit much more pervasive reliably unusual price responses. Regardless of how we partition forecasts (firm-year, analyst-firm, analyst-year, or analyst-firm-year), we find that the majority of price responses are not reliably larger than those observed on average non-event days, and for the sample with fewest confounding events, the incidence of insignificant price responses is between 86 % and 99%. Overall, we interpret these results as providing evidenc