Analysts’ earnings forecasts have a negligible effect on a company’s share price, according to new research that will raise further doubts over stock-pickers’ ability to move markets.
The study will fuel the debate over the usefulness of analysts’ predictions for hedge funds, which want research that affects share prices, at a time when banks are seeking to attract investors that trade frequently.
The authors of the study – Robert Hansen and Vadim Balashov of Tulane University and Oya Altinkilic of the University of Pittsburgh – looked at 196,000 revisions of quarterly and longer-term earnings forecasts by analysts between 1997 and 2007.
When they analysed the movement of shares in the 40 minutes surrounding the revision they found share prices remained almost unmoved – a sign investors had taken little notice of the change in earnings forecasts.
“Analysts may be very smart people,” Mr Hansen said, “but as a matter of stubborn fact the market pays them little heed and they are unlikely guides to beating the market.”
Previous studies, which looked at share price movements over longer periods of time, had shown that some analysts did move share prices, adding to the belief that good stock-pickers could help investors beat the market.
Mr Hansen said his study differed from previous ones because it analysed stock price movements in the tight 40-minute window surrounding the forecast change rather than the days before and after the revisions.
The authors argue that using a long time period is misleading as shares could move for several other reasons. However, they did analyse share price movements one hour each side of the 40-minute window and found share prices almost unmoved.
The latest study – coupled with a previous one by the same authors showing that analysts’ “buy” and “sell” recommendations had little effect on share prices – casts doubt on the mystique of star analysts.
The issue is contentious because banks have been trying to convince investors to pay for research and have highlighted their ability to provide clients with “tradeable ideas”.
“Our view is that earnings forecasts do not provide the market with new information about the stock,” Mr Hansen said. “It may be important information but it is . . . already in the stock price.”
Several research heads at banks declined to comment publicly on the study but one said that analysts added value in different ways and that moving share prices in the short term was not their primary goal.