How do financial analysts interpret industrial firms’ corporate refocusing announcements?

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    Abstract

    This study investigates how analysts perceive the effect of corporate refocusing announcements on UK industrial firms’ future earnings by examining current-year and one-year-ahead earnings forecast revisions, current-year target price revisions and earnings forecast errors in the five years surrounding a refocusing announcement year. The results reveal that analysts adjust their earnings forecasts downward in a refocusing announcement year and the following two years, predicting that operating performance in the post-refocusing period is likely to decline relative to their former earnings forecasts. Secondly, there is no evidence that analysts issue biased earnings forecasts after refocusing announcements or that their forecasts appear less accurate. Thirdly, they adjust their earnings forecasts downward in a refocusing announcement year with downward market movement. However, they do not similarly adjust their earnings forecast upward with upward market movement. The magnitude of downward adjustments exceeds that of upward adjustments. They also adjust current-year target price forecasts downward with downward market movement in the year prior to a refocusing announcement.
    Original languageEnglish
    Pages (from-to)493-511
    Number of pages19
    JournalThe British Accounting Review
    Volume49
    Issue number5
    Early online date5 Nov 2016
    DOIs
    Publication statusPublished - Sep 2017

    Keywords

    • Corporate refocusing activities
    • earnings forecast revisions
    • target price revisions
    • forecast errors

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