An Analysis of Causality in the Relationship between Analysts ’ Forecast Revisions and Market Prices: The European Experience

Abstract: The information provided by equity analysts to the market has been one of the most heavily researched areas in finance over the 30 years. One important question highlighted in this research has been the extent to which the information provided by sell-side analysts is useful to the market, especially given the pressures to which the analysts are subjected that can cause biases in the information that they provide. In this paper we attempt to shed some light on the extent of the information provided by the analysts by examining the direction of the causation between the revisions in the analysts ’ earnings forecast and the movement in stock prices. We find in the major European markets that the analysts are largely price followers with their earnings revisions being heavily influenced by recent price movements whereas the feedback from earnings revisions to price movements is minima